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Optimal Savings with Taxable and Tax-Deferred Accounts

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  • Francisco Gomes

    (London Business School)

  • Alexander Michaelides

    (London School of Economics)

  • Valery Polkovnichenko

    (University of Texas, Dallas)

Abstract

We solve and estimate a life-cycle model with earnings risk and liquidity constraints in the presence of tax-deferred retirement accounts (TDAs). We explicitly consider two very different types of households (with TDAs): direct and indirect stockholders. The latter hold stocks only through TDAs and, consistent with the data, save considerably less than the former, who hold stocks both inside and outside these accounts. We find that TDAs promote higher wealth accumulation but only marginally higher net savings. Consumption increases mostly during retirement, as desired, but the effect is largest for those households with higher savings rates already. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2009.01.004
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 12 (2009)
Issue (Month): 4 (October)
Pages: 718-735

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Handle: RePEc:red:issued:07-198

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Keywords: Tax-deferred accounts; Retirement savings; Liquidity constraints; Portfolio choice; Uninsurable earnings risk;

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References

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  1. Shlomo Benartzi & Richard Thaler, 2007. "Heuristics and Biases in Retirement Savings Behavior," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 21(3), pages 81-104, Summer.
  2. Alexander Michaelides & Francisco J. Gomes, 2005. "Optimal life cycle asset allocation : understanding the empirical evidence," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 193, London School of Economics and Political Science, LSE Library.
  3. B. Douglas Bernheim, 1999. "Taxation and Saving," Working Papers, Stanford University, Department of Economics 99007, Stanford University, Department of Economics.
  4. Garlappi, Lorenzo & Huang, Jennifer, 2006. "Are stocks desirable in tax-deferred accounts?," Journal of Public Economics, Elsevier, Elsevier, vol. 90(12), pages 2257-2283, December.
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  9. Mariacristina De Nardi & Eric French & John Bailey Jones, 2005. "Differential mortality, uncertain medical expenses, and the saving of elderly singles," Working Paper Series, Federal Reserve Bank of Chicago WP-05-13, Federal Reserve Bank of Chicago.
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  11. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 110(4), pages 825-853, August.
  12. Carroll, Christopher D, 1997. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(1), pages 1-55, February.
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  14. Robert M. Dammon & Chester S. Spatt & Harold H. Zhang, 2004. "Optimal Asset Location and Allocation with Taxable and Tax-Deferred Investing," Journal of Finance, American Finance Association, American Finance Association, vol. 59(3), pages 999-1037, 06.
  15. James M. Poterba & Steven F. Venti & David A. Wise, 1996. "How Retirement Saving Programs Increase Saving," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 10(4), pages 91-112, Fall.
  16. Duffie, Darrell & Singleton, Kenneth J, 1993. "Simulated Moments Estimation of Markov Models of Asset Prices," Econometrica, Econometric Society, Econometric Society, vol. 61(4), pages 929-52, July.
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  18. Cagetti, Marco, 2003. "Wealth Accumulation over the Life Cycle and Precautionary Savings," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 21(3), pages 339-53, July.
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Citations

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Cited by:
  1. Zhou, Jie, 2012. "Life-cycle stock market participation in taxable and tax-deferred accounts," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 36(11), pages 1814-1829.
  2. Paula Lopes & Alex Michaelides & Joachim Inkmann, 2009. "How deep is the annuity market participation puzzle?," 2009 Meeting Papers, Society for Economic Dynamics 239, Society for Economic Dynamics.
  3. Le Blanc, Julia & Scholl, Almuth, 2011. "Optimal savings for retirement: The role of individual accounts and disaster expectations," Discussion Paper Series 1: Economic Studies, Deutsche Bundesbank, Research Centre 2011,33, Deutsche Bundesbank, Research Centre.
  4. Fischer, Marcel & Kraft, Holger & Munk, Claus, 2013. "Asset allocation over the life cycle: How much do taxes matter?," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 37(11), pages 2217-2240.
  5. Hans Fehr, 2009. "Computable Stochastic Equilibrium Models and Their Use in Pension- and Ageing Research," De Economist, Springer, Springer, vol. 157(4), pages 359-416, December.
  6. Marco Angrisani & Michael D. Hurd & Erik Meijer, 2012. "Investment Decisions in Retirement: The Role of Subjective Expectations," Working Papers, University of Michigan, Michigan Retirement Research Center wp274, University of Michigan, Michigan Retirement Research Center.
  7. Katarzyna Romaniuk, 2013. "Pension fund taxation and risk-taking: should we switch from the EET to the TEE regime?," Annals of Finance, Springer, Springer, vol. 9(4), pages 573-588, November.
  8. Marekwica, Marcel, 2012. "Optimal tax-timing and asset allocation when tax rebates on capital losses are limited," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(7), pages 2048-2063.
  9. Jonathan Huntley & Valentina Michelangeli, 2011. "Can Tax Rebates Stimulate Consumption Spending in a Life-Cycle Model? (Working Paper 2011-02)," Working Papers, Congressional Budget Office 41581, Congressional Budget Office.
  10. Marekwica, Marcel & Schaefer, Alexander & Sebastian, Steffen, 2013. "Life cycle asset allocation in the presence of housing and tax-deferred investing," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 37(6), pages 1110-1125.
  11. Roine Vestman, 2013. "Limited Stock Market Participation Among Renters and Home Owners," 2013 Meeting Papers, Society for Economic Dynamics 549, Society for Economic Dynamics.
  12. Kosuke Aoki, 2010. "Inflation, Money Demand and Portfolio Choice," 2010 Meeting Papers, Society for Economic Dynamics 750, Society for Economic Dynamics.

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