Missing the Target? Retirement Expectations and Target Date Funds
67 Pages Posted: 14 Dec 2021
Date Written: December 1, 2021
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
Suggested Citation: Suggested Citation