An Assessment of Life-Cycle Funds
AbstractLife-cycle funds offer an intuitive approach to retirement investing. Despite their intuitive appeal, the empirical and theoretical support for life-cycle funds is mixed. We examine life-cycle funds using dynamic optimization techniques to evaluate the optimal asset allocation over the life cycle. In our modeling we introduce a utility function that accounts for the individual’s taste for bearing risk and analyze the role of human capital on allocation decisions. The simulations generally support the use of target retirement date funds once human capital is taken into account. Investment fees, however, could potentially erode any increased asset levels that life-cycle funds create. Ultimately, an appropriate asset allocation depends on individuals’ objectives and the opportunities available in financial markets.
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Bibliographic InfoPaper provided by Center for Retirement Research in its series Working Papers, Center for Retirement Research at Boston College with number wp2008-10.
Length: 37 pages
Date of creation: Apr 2008
Date of revision: May 2008
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-03-28 (All new papers)
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- Wade D. Pfau, 2010. "The Portfolio Size Effect and Lifecycle Asset Allocation Funds: A Different Perspective," GRIPS Discussion Papers 10-11, National Graduate Institute for Policy Studies.
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