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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  

Benjamin Bridges

U.S. Social Security Administration

Robert Gesumaria

Government of the United States of America - Office of Research, Evaluation and Statistics

Michael V. Leonesio

Social Security Administration - Office of Research, Evaluation and Statistics

Date Written: February 3, 2010

Abstract

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

Bridges, Benjamin and Gesumaria, Robert and Leonesio, Michael V., Assessing the Performance of Life-Cycle Portfolio Allocation Strategies for Retirement Saving: A Simulation Study (February 3, 2010). Social Security Bulletin, Vol. 70, No. 1, pp. 23-43, 2010. Available at SSRN: https://ssrn.com/abstract=1547064

Benjamin Bridges (Contact Author)

U.S. Social Security Administration ( email )

Washington, DC 20254
United States

Robert Gesumaria

Government of the United States of America - Office of Research, Evaluation and Statistics ( email )

Washington, DC
United States

Michael V. Leonesio

Social Security Administration - Office of Research, Evaluation and Statistics ( email )

Washington, DC
United States

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