Missing the Target? Retirement Expectations and Target Date Funds

61 Pages Posted: 14 Dec 2021 Last revised: 29 Dec 2022

See all articles by Byeong-Je An

Byeong-Je An

Nanyang Business School, Nanyang Technological University

Kunal Sachdeva

Rice University - Jesse H. Jones Graduate School of Business

Date Written: September 13, 2022

Abstract

Do households make errors when forming retirement expectations, and if so, are they economically important? Using data that follows households for nearly three decades, we show that respondents systematically underestimate their long-run labor participation. We use these insights to build a life-cycle model of investment and retirement to measure the costs of these errors. Our model calibration suggests that errors in expectations lead to misallocations that compound over decades, costing the median respondent over $16,525, or roughly 4% of lifetime wealth. Cross-sectional relationships in the data suggest that women and minorities tend to be disproportionately affected by these errors.

Keywords: Financial Instruments, Target-date Funds, Retirement, Expectations, Longevity

JEL Classification: D14, D15, G11, G23

Suggested Citation

An, Byeong-Je and Sachdeva, Kunal, Missing the Target? Retirement Expectations and Target Date Funds (September 13, 2022). Nanyang Business School Research Paper No. 22-40, Available at SSRN: https://ssrn.com/abstract=3981048 or http://dx.doi.org/10.2139/ssrn.3981048

Byeong-Je An

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

Kunal Sachdeva (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

HOME PAGE: http://kunalsachdeva.com

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