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Optimal life-cycle investing with flexible labor supply : a welfare analysis of life-cycle funds

Author: Francisco J Gomes; Laurence J Kotlikoff; Luis M Viceira; National Bureau of Economic Research.
Publisher: Cambridge, Mass. : National Bureau of Economic Research, 2008.
Series: Working paper series (National Bureau of Economic Research), no. 13966.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Database:WorldCat
Summary:
We investigate optimal consumption, asset accumulation and portfolio decisions in a realistically calibrated life-cycle model with flexible labor supply. Our framework allows for wage rate uncertainly, variable labor supply, social security benefits and portfolio choice over safe bonds and risky equities. Our analysis reinforces prior findings that equities are the preferred asset for young households, with the  Read more...
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Details

Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Francisco J Gomes; Laurence J Kotlikoff; Luis M Viceira; National Bureau of Economic Research.
OCLC Number: 225909292
Notes: "April 2008."
Description: 1 online resource (15 p)
Series Title: Working paper series (National Bureau of Economic Research), no. 13966.
Responsibility: Francisco J. Gomes, Laurence J. Kotlikoff, Luis M. Viceira.

Abstract:

We investigate optimal consumption, asset accumulation and portfolio decisions in a realistically calibrated life-cycle model with flexible labor supply. Our framework allows for wage rate uncertainly, variable labor supply, social security benefits and portfolio choice over safe bonds and risky equities. Our analysis reinforces prior findings that equities are the preferred asset for young households, with the optimal share of equities generally declining prior to retirement. However, variable labor materially alters pre-retirement portfolio choice by significantly raising optimal equity holdings. Using this model, we also investigate the welfare costs of constraining portfolio allocations over the life cycle to mimic popular default investment choices in defined-contribution pension plans, such as stable value funds, balanced funds, and life-cycle (or target date) funds. We find that life-cycle funds designed to match the risk tolerance and investment horizon of investors have small welfare costs. All other choices, including life-cycle funds which do not match investors' risk tolerance, can have substantial welfare costs.

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Linked Data


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