Life-cycle Asset Allocation Strategies and the Distribution of 401(k) Retirement Wealth

James M. Poterba, Joshua Rauh, Steven F. Venti and David A. Wise

in Developments in the Economics of Aging

Published by University of Chicago Press

Published in print April 2009 | ISBN: 9780226903354
Published online February 2013 | e-ISBN: 9780226903361 | DOI:
Life-cycle Asset Allocation Strategies and the Distribution of 401(k) Retirement Wealth

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This chapter presents evidence on the distribution of balances in 401(k)-type retirement saving accounts under various asset allocation strategies that investors might choose. In addition to a range of age-invariant strategies, such as an all-bond and an all-stock strategy, it considers several different life-cycle funds that automatically alter the investor's mix of assets as he or she ages; and a no lose allocation strategy, in which households purchase enough riskless bonds at each age to ensure that they will have no less than their nominal contribution when they reach retirement age, and then invest the balance in corporate stock. The results suggest several conclusions about the effect of investment strategy on retirement wealth. First, the distribution of retirement wealth associated with typical life-cycle investment strategies is similar to that from age-invariant asset allocation strategies that set the equity share of the portfolio equal to the average equity share in the lifecycle strategies. Second, the expected utility associated with different 401(k) asset allocation strategies, and the ranking of these strategies, is very sensitive to three parameters: the expected return on corporate stock, the relative risk aversion of the investing household, and the amount of non-401(k) wealth that the household will have available at retirement.

Keywords: retirement savings accounts; asset allocation; life-cycle funds; investment strategy; retirement income; retirement age; retirement wealth

Chapter.  15777 words.  Illustrated.

Subjects: Public Economics

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