NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Optimal Life-Cycle Investing with Flexible Labor Supply: A Welfare Analysis of Life-Cycle Funds

Francisco J. Gomes, Laurence J. Kotlikoff, Luis M. Viceira

NBER Working Paper No. 13966
Issued in April 2008
NBER Program(s):   AG   AP   PE

We investigate optimal consumption, asset accumulation and portfolio decisions in a realistically calibrated life-cycle model with flexible labor supply. Our framework allows for wage rate uncertainly, variable labor supply, social security benefits and portfolio choice over safe bonds and risky equities. Our analysis reinforces prior findings that equities are the preferred asset for young households, with the optimal share of equities generally declining prior to retirement. However, variable labor materially alters pre-retirement portfolio choice by significantly raising optimal equity holdings. Using this model, we also investigate the welfare costs of constraining portfolio allocations over the life cycle to mimic popular default investment choices in defined-contribution pension plans, such as stable value funds, balanced funds, and life-cycle (or target date) funds. We find that life-cycle funds designed to match the risk tolerance and investment horizon of investors have small welfare costs. All other choices, including life-cycle funds which do not match investors' risk tolerance, can have substantial welfare costs.

download in pdf format
   (232 K)

email paper

The NBER Bulletin on Aging and Health provides summaries of publications like this.  You can sign up to receive the NBER Bulletin on Aging and Health by email.

This paper is available as PDF (232 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w13966

Published: Francisco J. Gomes & Laurence J. Kotlikoff & Luis M. Viceira, 2008. "Optimal Life-Cycle Investing with Flexible Labor Supply: A Welfare Analysis of Life-Cycle Funds," American Economic Review, American Economic Association, vol. 98(2), pages 297-303, May. citation courtesy of

Users who downloaded this paper also downloaded these:
Campbell, Cocco, Gomes, and Maenhout Investing Retirement Wealth: A Life-Cycle Model
Poterba, Rauh, Venti, and Wise w11974 Lifecycle Asset Allocation Strategies and the Distribution of 401(k) Retirement Wealth
Chai, Horneff, Maurer, and Mitchell w15079 Extending Life Cycle Models of Optimal Portfolio Choice: Integrating Flexible Work, Endogenous Retirement, and Investment Decisions with Lifetime Payouts
Viceira w7409 Optimal Portfolio Choice for Long-Horizon Investors with Nontradable Labor Income
Ayres and Nalebuff w14094 Life-cycle Investing and Leverage: Buying Stock on Margin Can Reduce Retirement Risk
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us