Retirement Savings Portfolio Management

42 Pages Posted: 21 Feb 2008

See all articles by Jeff Dominitz

Jeff Dominitz

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management; RAND Corporation

Angela Hung

Carnegie Mellon University; RAND Corporation

Date Written: October 2006

Abstract

We assess the welfare implications of alternative retirement plan investment options given that households may not invest according to optimal portfolio choice theory but may instead use simple decision rules. We simulate the performance of lifestyle, lifecycle, and other simple strategies for allocating retirement savings. We find that if investors use simple rules of thumb to choose investments, then the impact of these strategies on welfare depend to a large extent on the choice set they are offered. If larger choice sets cause them to undertake more risk, then risk tolerant individuals may tend to be made better off. If larger choice sets cause them to reduce suboptimally low levels of portfolio risk, then the increased choice set may make them substantially worse off. The welfare effects of plan designs that induce lifecycle investing, which tends to be conservative over the lifetime, therefore depend crucially on the counterfactual portfolio composition, as well as preferences and non-retirement wealth.

Suggested Citation

Dominitz, Jeff and Hung, Angela, Retirement Savings Portfolio Management (October 2006). Michigan Retirement Research Center Research Paper No. WP 2006-138, Available at SSRN: https://ssrn.com/abstract=1095290 or http://dx.doi.org/10.2139/ssrn.1095290

Jeff Dominitz (Contact Author)

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management ( email )

Pittsburgh, PA 15213-3890
United States

RAND Corporation ( email )

1776 Main Street
P.O. Box 2138
Santa Monica, CA 90407-2138
United States

Angela Hung

Carnegie Mellon University ( email )

Pittsburgh, PA 15213-3890
United States

RAND Corporation ( email )

1776 Main Street
P.O. Box 2138
Santa Monica, CA 90407-2138
United States

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