Assessing the Performance of Life-Cycle Portfolio Allocation Strategies for Retirement Saving: A Simulation Study
Social Security Bulletin, Vol. 70, No. 1, pp. 23-43, 2010
21 Pages Posted: 4 Feb 2010
Date Written: February 3, 2010
This article examines the performance of four life-cycle portfolio allocation strategies through stochastic simulation based on observed U.S. asset returns during 1926-2008. Annual worker contributions to retirement savings accounts are based on the actual lifetime earnings histories maintained by the Social Security Administration for 12,871 workers born during 1915-1942. Each strategy’s performance is evaluated primarily on the basis of the distributions of internal rates of return on investments calculated at the time of retirement. Comparisons are made with the performance of four other investment strategies that vary in terms of their exposure to stock and bond market risk. Life-cycle plans with larger portfolio weights assigned to equities have higher average returns, but those gains come at the cost of increased risk of infrequent bad outcomes.
Keywords: retirement planning, retirement saving, life-cycle funds, personal investment
JEL Classification: D14, G11, J26
Suggested Citation: Suggested Citation