Portfolio Choice and Asset Allocation
Paper Session
Saturday, Jan. 4, 2025 2:30 PM - 4:30 PM (PST)
- Chair: Xing Huang, Washington University-St. Louis
Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice
Abstract
We challenge two tenets of lifecycle investing: (i) diversify across stocks and bonds and (ii) reduce equity allocations with age. An optimal lifetime allocation of 33% domestic stocks, 67% international stocks, 0% bonds, and 0% bills vastly outperforms age-based, stock-bond strategies in building wealth, supporting retirement consumption, preserving capital, and generating bequests. Our lifecycle model preserves crucial time-series and cross-sectional dependencies in asset returns and addresses small sample issues in US data. Our investors prefer diversifying with international stocks, not bonds. Target-date fund investors need 61% more pre-retirement savings to match the all-equity strategy’s expected utility over retirement consumption and bequest.How Do Consumers Finance Increased Retirement Savings?
Abstract
The welfare impact of increasing retirement contributions depends on how individuals adjust their spending, borrowing, and non-retirement savings in response. Using newly merged deposit-, credit-, and pension-account data from a large UK financial institution, we estimate the relevant elasticities by leveraging a policy that incrementally increased minimum retirement contributions in the U.K. from 2% to 8% of salary between March 2018 and April 2019. For every £1 reduction in monthly take-home pay due to higher employee pension contributions, consumers cut their spending by £0.34 (especially in the restaurant and leisure categories) and finance the remaining with lower deposit account balances and higher credit card debt levels. Those with lower initial deposit balances cut their spending the most, while those with significant liquid savings draw down their deposits. Interpreted via a structural life-cycle model, these results suggest that a social planner concerned about undersaving should target retirement saving interventions at low-liquidity individuals whose spending is more elastic to increased retirement saving. In contrast, interventions that increase the retirementcontributions of high-liquidity individuals are both less efficient (due to large crowd-out) and often regressive.
Discussant(s)
Cameron Peng
,
London School of Economics and Political Science
Kunal Sachdeva
,
University of Michigan
Jialan Wang
,
University of Illinois
JEL Classifications
- G1 - General Financial Markets