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The Location and Allocation of Assets in Pension and Conventional Savings Accounts

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  • John B. Shoven
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    Abstract

    This paper addresses two important parts of the problem of saving for retirement. They are (1) if assets are to be held in both conventional (and hence taxable) accounts and pension accounts, which assets should be held in each? and, (2) if the investor is substantially risk averse, what is the optimal mix of stocks and bonds for retirement saving? It is shown that the conventional wisdom of first placing heavily taxed corporate bonds in the pension account (and holding equity mutual funds outside the account) is the wrong asset location strategy for most people and most circumstances. It is also shown that even very risk averse retirement savers should allocate more than half of their portfolio to stocks if asset returns have the same means, variances, and covariances as have been observed over the past seventy years.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7007.

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    Date of creation: Mar 1999
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    Publication status: published as Shoven, John B. and Clemens Sialm. "Asset Location In Tax-Deferred And Conventional Savings Accounts," Journal of Public Economics, 2004, v88(1-2,Jan), 23-38.
    Handle: RePEc:nbr:nberwo:7007

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    1. N. Gregory Mankiw & James Poterba, 1996. "Stock-Market Yields and the Pricing of Municipal Bonds," Harvard Institute of Economic Research Working Papers 1761, Harvard - Institute of Economic Research.
    2. John B. Shoven & David A. Wise, 1998. "The Taxation of Pensions: A Shelter Can Become a Trap," NBER Chapters, in: Frontiers in the Economics of Aging, pages 173-212 National Bureau of Economic Research, Inc.
    3. Thomas E. MaCurdy & John B. Shoven, 1992. "Stocks, Bonds, and Pension Wealth," NBER Chapters, in: Topics in the Economics of Aging, pages 61-78 National Bureau of Economic Research, Inc.
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    Cited by:
    1. Frédéric Gonand, 2004. "Fonds de pension américains : une évaluation du risque macroéconomique," Revue d'Économie Financière, Programme National Persée, vol. 75(2), pages 291-311.
    2. Jennings, William W. & Reichenstein, William, 2001. "The value of retirement income streams: the value of military retirement," Financial Services Review, Elsevier, vol. 10(1-4), pages 19-35.
    3. Gene Amromin, 2005. "Precautionary savings motives and tax efficiency of household portfolios: an empirical analysis," Finance and Economics Discussion Series 2005-01, Board of Governors of the Federal Reserve System (U.S.).
    4. James M. Poterba & Andrew Samwick, 1999. "Taxation and Household Portfolio Composition: U.S. Evidence from the 1980s and 1990s," NBER Working Papers 7392, National Bureau of Economic Research, Inc.
    5. Daniel Bergstresser & James Poterba, 2002. "Asset Allocation and Asset Location: Household Evidence from the Survey of Consumer Finances," NBER Working Papers 9268, National Bureau of Economic Research, Inc.
    6. Gary V. Engelhardt & Anil Kumar, 2007. "Employer matching and 401(k) saving: Evidence from the health and retirement study," NBER Chapters, in: Trans-Atlantic Public Economics Seminar (TAPES), Public Policy and Retirement, pages 1920-1943 National Bureau of Economic Research, Inc.
    7. John B. Shoven & Clemens Sialm, 1999. "Asset Location in Tax-Deferred and Conventional Savings Accounts," NBER Working Papers 7192, National Bureau of Economic Research, Inc.
    8. Srinivas, P.S. & Whitehouse, Edward & Yermo, Juan, 2000. "Regulating private pension funds’ structure, performance and investments: cross-country evidence," MPRA Paper 14753, University Library of Munich, Germany.
    9. James M. Poterba, 2001. "Taxation and Portfolio Structure: Issues and Implications," NBER Working Papers 8223, National Bureau of Economic Research, Inc.
    10. Gene Amromin, 2008. "Precautionary Savings Motives and Tax Efficiency of Household Portfolios: An Empirical Analysis," NBER Chapters, in: Tax Policy and the Economy, Volume 22, pages 5-41 National Bureau of Economic Research, Inc.
    11. J. Ph. & GAUDEMET, 2001. "The purchase of individual life-annuities: a description of the french institutional setting," Documents de Travail de la DESE - Working Papers of the DESE g2001-08, Institut National de la Statistique et des Etudes Economiques, DESE.
    12. James M. Poterba & John B. Shoven & Clemens Sialm, 2000. "Asset Location for Retirement Savers," NBER Working Papers 7991, National Bureau of Economic Research, Inc.
    13. Zhou, Jie, 2009. "The asset location puzzle: Taxes matter," Journal of Economic Dynamics and Control, Elsevier, vol. 33(4), pages 955-969, April.
    14. Cunningham, Christopher R. & Engelhardt, Gary V., 2002. "Federal Tax Policy, Employer Matching, and 401(k) Saving: Evidence from HRS W-2 Records," National Tax Journal, National Tax Association, vol. 55(3), pages 617-45, September.
    15. Tang, Ning & Mitchell, Olivia S. & Mottola, Gary R. & Utkus, Stephen P., 2010. "The efficiency of sponsor and participant portfolio choices in 401(k) plans," Journal of Public Economics, Elsevier, vol. 94(11-12), pages 1073-1085, December.

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