TY - JOUR AU - Poterba,James AU - Rauh,Joshua AU - Venti,Steven AU - Wise,David TI - Lifecycle Asset Allocation Strategies and the Distribution of 401(k) Retirement Wealth JF - National Bureau of Economic Research Working Paper Series VL - No. 11974 PY - 2006 Y2 - January 2006 UR - http://www.nber.org/papers/w11974 L1 - http://www.nber.org/papers/w11974.pdf N1 - Author contact info: James M. Poterba Department of Economics MIT, E52-350 50 Memorial Drive Cambridge, MA 02142-1347 Tel: 617/253-6673 Fax: 617/258-7804 E-Mail: poterba@nber.org Joshua Rauh Kellogg School of Management Northwestern University 2001 Sheridan Road Evanston, IL 60208 Tel: 847/491-4462 Fax: 847/491-5719 E-Mail: joshua-rauh@kellogg.northwestern.edu Steven F. Venti Department of Economics 6106 Rockefeller Center Dartmouth College Hanover, NH 03755 Tel: 603/646-2526 Fax: 603/646-2122 E-Mail: steven.f.venti@dartmouth.edu David A. Wise Harvard Kennedy School 79 John F. Kennedy Cambridge, MA 02138 E-Mail: dwise@nber.org M1 - published as James M. Poterba, Joshua Rauh, Steven F. Venti, David A. Wise. "Lifecycle Asset Allocation Strategies and the Distribution of 401(k) Retirement Wealth," in David A. Wise, editor, "Developments in the Economics of Aging" University of Chicago Press (2009) AB - This paper examines how different asset allocation strategies over the course of a worker's career affect the distribution of retirement wealth and the expected utility of wealth at retirement. It considers both rules that allocate a constant portfolio fraction to various assets at all ages, as well as "lifecycle" rules that vary the mix of portfolio assets as the worker ages. The analysis simulates retirement wealth using asset returns that are drawn from the historical return distribution. The results suggest that the distribution of retirement wealth associated with typical lifecycle investment strategies is similar to that from age-invariant asset allocation strategies that set the equity share of the portfolio equal to the average equity share in the lifecycle strategies. There is substantial variation across workers with different characteristics in the expected utility from following different asset allocation strategies. The expected utility associated with different 401(k) asset allocation strategies, and the ranking of these strategies, is very sensitive to three parameters: the expected return on corporate stock, the worker's relative risk aversion, and the amount of non-401(k) wealth that the worker will have available at retirement. At modest levels of risk aversion, or in the presence of substantial non-401(k) wealth at retirement, the historical pattern of stock and bond returns implies that the expected utility of an all-stock investment allocation rule is greater than that from any of the more conservative strategies. Higher risk aversion or lower expected returns on stocks raise the expected utility of following lifecycle strategies or other strategies that reduce equity exposure throughout the lifetime. ER -