16 Pages Posted: 6 Jun 2017
Date Written: June 5, 2017
Target Date Funds have become very popular with investors saving for retirement. The main feature of these funds is that investors are automatically switched from high risk to low risk assets as retirement approaches. However, our analysis brings into question the rationale behind these funds. Based on a model with parameters fitted to historical returns, and also on model independent bootstrap resampling, we find that constant proportion strategies give virtually the same results for terminal wealth at the retirement date as target date strategies. This suggests that the vast majority of Target Date Funds are serving investors poorly. However, if we allow the asset allocation strategy to adapt to the current level of the total portfolio value, significantly lower risk of terminal wealth can be achieved, at no cost to its expected value.
Keywords: Retirement savings, target date funds, optimal asset allocation
JEL Classification: G32
Suggested Citation: Suggested Citation
Forsyth, Peter and Vetzal, Kenneth R. and Westmacott, Graham, Target Wealth: The Evolution of Target Date Funds (June 5, 2017). Available at SSRN: https://ssrn.com/abstract=2980952 or http://dx.doi.org/10.2139/ssrn.2980952