Missing the Target? Retirement Expectations and Target Date Funds

Abstract

This paper measures the cost of biased retirement expectations for investors in target-date funds. Using survey data, we show that respondents systematically underestimate their long-run labor participation on average by 4.8 years, with errors having meaningful cross-sectional relationships. We use these insights to build a life-cycle model of target-date funds to measure the costs of biased expectations. Calibrations suggest that errors in expectations compound over time, costing the median respondent 4% of total wealth, equivalent to 0.2% a year. These estimates suggest that the choice architecture of target-date funds should be modified to improve the financial adequacy of future retirees.

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

JEL Classification: D14, D15, G11, G23