Money-Back Guarantees in Individual Retirement Accounts: Still a Good Deal?
66 Pages Posted: 23 Oct 2019 Last revised: 12 Mar 2021
Date Written: March 7, 2021
Capital market volatility spurs interest in protecting retirement accounts; one such approach is to require money-back guarantees. Using a lifecycle model where investors have access to stocks, bonds, and tax-qualified retirement accounts, we show that such guarantees alter participant consumption, saving, and investment behavior during times of high interest rates, but impacts are even larger in a low-return environment. We conclude that abandoning guarantees could enhance old-age consumption for over 80% of retirees, particularly lower earners, without harming pre-retirement consumption. Our results are of interest for default investment options in individual retirement accounts such as the Pan-European Personal Pension Products.
Keywords: individual retirement account, investment guarantee, longevity risk, retirement income, life cycle portfolio choice
JEL Classification: D14, G20, G11, G51, J26
Suggested Citation: Suggested Citation