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Wealth Accumulation and Portfolio Choice with Taxable and Tax-Deferred Accounts

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  • Alex Michaelides
  • Francisco Gomes
  • Valery Polkovnichenko

Abstract

We calibrate a life-cycle model with uninsurable labor income risk and borrowing constraints to match wealth accumulation and portfolio allocation profiles of direct and indirect stockholders in both taxable and tax-deferred accounts. Tax-deferred accounts generate an increase in wealth accumulation that is larger for wealthier households. Furthermore, while the cost of following a fixed contribution rate over the life cycle is small, the optimal rate can differ substantially across households, and the welfare losses from choosing the wrong one can be substantial. Finally, the welfare gain from having access to a tax-deferred account ranges from less than 0.1\% to 11.5\%, depending on the preference parameters

Suggested Citation

  • Alex Michaelides & Francisco Gomes & Valery Polkovnichenko, 2006. "Wealth Accumulation and Portfolio Choice with Taxable and Tax-Deferred Accounts," Computing in Economics and Finance 2006 23, Society for Computational Economics.
    • Handle: RePEc:sce:scecfa:23
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    Cited by:

    1. Horneff, Wolfram J. & Maurer, Raimond H. & Stamos, Michael Z., 2008. "Life-cycle asset allocation with annuity markets," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3590-3612, November.
    2. Wolfram J. Horneff & Raimond H. Maurer & Olivia S. Mitchel & Michael Z. Stamos, 2008. "Asset Allocation and Location over the Life Cycle with Survival-Contingent Payouts," Working Papers wp177, University of Michigan, Michigan Retirement Research Center.
    3. Wolfram J. Horneff & Raimond H. Maurer & Olivia S. Mitchell & Michael Z. Stamos, 2008. "Asset Allocation and Location over the Life Cycle with Survival-Contingent Payouts," NBER Working Papers 14055, National Bureau of Economic Research, Inc.
    4. Shinichi Nishiyama, 2009. "The Effect of Tax-Deferred Retirement Saving Accounts: A Dynamic General Equilibrium Analysis," 2009 Meeting Papers 957, Society for Economic Dynamics.
    5. Clement Joubert, 2011. "Pension design with a large informal labor market: evidence from Chile," 2011 Meeting Papers 1136, Society for Economic Dynamics.
    6. Ebrahim, M. Shahid & Mathur, Ike & ap Gwilym, Rhys, 2014. "Integrating corporate ownership and pension fund structures: A general equilibrium approach," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 553-569.
    7. Clement Joubert, 2010. "Dynamic labor supply and saving incentives in privatized pension systems: evidence from Chile," 2010 Meeting Papers 291, Society for Economic Dynamics.
    8. Wolfram Horneff & Raimond Maurer & Michael Stamos, 2006. "Life-Cycle Asset Allocation with Annuity Markets: Is Longevity Insurance a Good Deal?," Working Papers wp146, University of Michigan, Michigan Retirement Research Center.

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    More about this item

    Keywords

    Portfolio Choice; Tax-Deferred Accounts; Retirement Savings; Liquidity Constraints; Uninsurable Labor Income Risk.;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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