How Persistent Low Expected Returns Alter Optimal Life Cycle Saving, Investment, and Retirement Behavior

21 Pages Posted: 27 Nov 2017

See all articles by Vanya Horneff

Vanya Horneff

Goethe University Frankfurt - Research Center SAFE

Raimond Maurer

Goethe University Frankfurt - Finance Department

Olivia S. Mitchell

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 23, 2017

Abstract

This Chapter explores how an environment of persistent low returns influences saving, investing, and retirement behaviors, as compared to what in the past had been thought of as more “normal” financial conditions. Our calibrated lifecycle dynamic model with realistic tax, minimum distribution, and Social Security benefit rules produces results that agree with observed saving, work, and claiming age behavior of U.S. households. In particular, our model generates a large peak at the earliest claiming age at 62, as in the data. Also in line with the evidence, our baseline results show a smaller second peak at the (system-defined) Full Retirement Age of 66. In the context of a zero-return environment, we show that workers will optimally devote more of their savings to non-retirement accounts and less to 401(k) accounts, since the relative appeal of investing in taxable versus tax-qualified retirement accounts is lower in a low return setting. Finally, we show that people claim Social Security benefits later in a low interest rate environment.

Keywords: Dynamic Portfolio Choice, 401(K) Plan, Saving, Social Security Claiming Age, Retirement Income, Minimum Distribution Requirements, Tax

JEL Classification: G11, G22, D14, D91

Suggested Citation

Horneff, Vanya and Maurer, Raimond and Mitchell, Olivia S., How Persistent Low Expected Returns Alter Optimal Life Cycle Saving, Investment, and Retirement Behavior (June 23, 2017). SAFE Working Paper No. 190. Available at SSRN: https://ssrn.com/abstract=3076397 or http://dx.doi.org/10.2139/ssrn.3076397

Vanya Horneff (Contact Author)

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Raimond Maurer

Goethe University Frankfurt - Finance Department ( email )

Grüneburgplatz 1
House of Finance
Frankfurt, 60323
Germany

Olivia S. Mitchell

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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