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Retirement Savings Portfolio Management

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Author Info
Jeff Dominitz (RAND)
Angela Hung (RAND)

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Abstract

We assess the welfare implications of alternative retirement plan investment options given that households may not invest according to optimal portfolio choice theory but may instead use simple decision rules. We simulate the performance of lifestyle, lifecycle, and other simple strategies for allocating retirement savings. We find that if investors use simple rules of thumb to choose investments, then the impact of these strategies on welfare depend to a large extent on the choice set they are offered. If larger choice sets cause them to undertake more risk, then risk tolerant individuals may tend to be made better off. If larger choice sets cause them to reduce suboptimally low levels of portfolio risk, then the increased choice set may make them substantially worse off. The welfare effects of plan designs that induce lifecycle investing, which tends to be conservative over the lifetime, therefore depend crucially on the counterfactual portfolio composition, as well as preferences and non-retirement wealth.

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Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp138.

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Length: 42 pages
Date of creation: Oct 2006
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Handle: RePEc:mrr:papers:wp138

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    • Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier. [Downloadable!] (restricted)
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  15. Bodie, Zvi & Merton, Robert C. & Samuelson, William F., 1992. "Labor supply flexibility and portfolio choice in a life cycle model," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 427-449. [Downloadable!] (restricted)
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  16. Brigitte C. Madrian & Dennis F. Shea, 2000. "The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior," NBER Working Papers 7682, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  17. Jeff Dominitz & Charles F. Manski, 2004. "How Should We Measure Consumer Confidence?," Journal of Economic Perspectives, American Economic Association, vol. 18(2), pages 51-66, Spring. [Downloadable!] (restricted)
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