The Effect of Uncertain Labor Income and Social Security on Life-Cycle Portfolios
21 Pages Posted: 25 Jan 2010 Last revised: 6 Feb 2010
Date Written: January 2010
This paper examines how labor income volatility and social security benefits can influence lifecycle household portfolios. We examine how much the individual optimally saves and where, taking into account liquid financial wealth and annuities, and stocks as well as bonds. Higher labor income uncertainty and lower old-age benefits boost demand for stable income in retirement, but also when young. In addition, a declining equity glide path with age is appropriate for the worker with low income uncertainty; for the high income risk worker, equity exposure rises until retirement. We also evaluate how differences in social security benefits can influence retirement risk management.
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