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Age-dependent investing: Optimal funding and investment strategies in defined contribution pension plans when members are rational life cycle financial planners

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  • Blake, David
  • Wright, Douglas
  • Zhang, Yumeng

Abstract

A defined contribution pension plan allows consumption to be redistributed from the plan member's working life to retirement in a manner that is consistent with the member's personal preferences. The plan's optimal funding and investment strategies therefore depend on the desired profile of consumption over the lifetime of the member. We investigate these strategies under the assumption that the member is a rational life cycle financial planner and has an Epstein–Zin utility function, which allows a separation between risk aversion and the elasticity of intertemporal substitution. We also take into account the member's human capital during the accumulation phase of the plan and we allow the annuitisation decision to be endogenously determined during the decumulation phase.

Suggested Citation

  • Blake, David & Wright, Douglas & Zhang, Yumeng, 2014. "Age-dependent investing: Optimal funding and investment strategies in defined contribution pension plans when members are rational life cycle financial planners," Journal of Economic Dynamics and Control, Elsevier, vol. 38(C), pages 105-124.
    • Handle: RePEc:eee:dyncon:v:38:y:2014:i:c:p:105-124
    DOI: 10.1016/j.jedc.2013.11.001
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    More about this item

    Keywords

    Defined contribution pension plan; Funding strategy; Investment strategy; Epstein–Zin utility; Stochastic lifestyling; Phased annuitisation; Dynamic programming;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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