Missing the Target? Retirement Expectations and Target Date Funds

Nanyang Business School Research Paper No. 22-40

79 Pages Posted: 17 Dec 2021 Last revised: 22 Mar 2024

See all articles by Byeong-Je An

Byeong-Je An

San Diego State University - Finance Department

Kunal Sachdeva

Rice University - Jesse H. Jones Graduate School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: December 14, 2021

Abstract

Do households make errors when forming retirement expectations, and if so, are they economically important? Leveraging nearly three decades of panel data, we reveal that individuals consistently underestimate their long-term labor participation. This paper introduces a novel model of endogenous retirement choice, integrating biases in life expectancy to quantify the welfare costs. While sub-optimal risk allocation has a marginal impact, inconsistent choices over time lower overall welfare. Errors cost the median respondent over $22,216 in retirement wealth or 12% of certainty equivalent wealth. Cross-sectional analysis suggests that a combination of behavioral biases, risk-aversion, and socioeconomic factors relate to expectation 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 (December 14, 2021). 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

San Diego State University - Finance Department ( email )

5500 Campanile Drive
San Diego, CA 92182-8236
United States

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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