Missing the Target? Retirement Expectations and Target Date Funds
61 Pages Posted: 14 Dec 2021 Last revised: 29 Dec 2022
Date Written: September 13, 2022
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: Suggested Citation