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An Assessment of Life-Cycle Funds

Author

Listed:
  • Mauricio Soto
  • Robert K. Triest
  • Alex Golub-Sass
  • Francesca Golub-Sass

Abstract

Life-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.

Suggested Citation

  • Mauricio Soto & Robert K. Triest & Alex Golub-Sass & Francesca Golub-Sass, 2008. "An Assessment of Life-Cycle Funds," Working Papers, Center for Retirement Research at Boston College wp2008-10, Center for Retirement Research, revised May 2008.
  • Handle: RePEc:crr:crrwps:wp2008-10
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    File URL: http://crr.bc.edu/working-papers/an-assessment-of-life-cycle-funds/
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    References listed on IDEAS

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    1. Courtney C. Coile & Phillip B. Levine, 2006. "Bulls, Bears, and Retirement Behavior," ILR Review, Cornell University, ILR School, vol. 59(3), pages 408-429, April.
    2. F. Thomas Juster & Richard Suzman, 1995. " An Overview of the Health and Retirement Study," Journal of Human Resources, University of Wisconsin Press, vol. 30, pages s7-s56.
    3. Ruhm, Christopher J, 1990. "Bridge Jobs and Partial Retirement," Journal of Labor Economics, University of Chicago Press, vol. 8(4), pages 482-501, October.
    4. Coile Courtney, 2004. "Retirement Incentives and Couples' Retirement Decisions," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 4(1), pages 1-30, July.
    5. Nicole Maestas, 2004. "Back to Work: Expectations and Realizations of Work After Retirement," Working Papers wp085, University of Michigan, Michigan Retirement Research Center.
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    Cited by:

    1. 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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