TY  - JOUR
AU  - Gomes,Francisco J.
AU  - Kotlikoff,Laurence J.
AU  - Viceira,Luis M.
TI  - Optimal Life-Cycle Investing with Flexible Labor Supply: A Welfare Analysis of Life-Cycle Funds
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13966
PY  - 2008
Y2  - April 2008
UR  - http://www.nber.org/papers/w13966
L1  - http://www.nber.org/papers/w13966.pdf
N1  - Author contact info:
Francisco Gomes
Finance Department
London Business School
Sussex Place
London NW1 4SA
UK
E-Mail: fgomes@london.edu

Laurence J. Kotlikoff
Department of Economics
Boston University
270 Bay State Road
Boston, MA 02215
Tel: 617/353-4002
Fax: 617/353-4001
E-Mail: kotlikoff@gmail.com

Luis M. Viceira
George E. Bates Professor
Harvard Business School
Baker Library 367
Boston, MA 02163
Tel: 617/495-6331
Fax: 617/496-7379
E-Mail: lviceira@hbs.edu
AB  - 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.
ER  -