Eggs and Baskets: Lifecycle Portfolio Dynamics

88 Pages Posted: 8 Apr 2022 Last revised: 27 Oct 2022

See all articles by Loretti Dobrescu

Loretti Dobrescu

UNSW Australia Business School, School of Economics

Akshay Shanker

University of New South Wales (UNSW)

Hazel Bateman

UNSW Sydney, CEPAR

Ben Rhodri Newell

Independent

Susan Thorp

The University of Sydney Business School

Date Written: March 29, 2022

Abstract

How do people save and allocate their asset portfolio over the lifetime? To answer this question, we build and estimate a dynamic lifecycle model of saving and portfolio choice. Besides safe and risky financial assets inside and outside pension plans with rich choice architecture, we also include risky labor income and housing. Using this model, we examine the behavior of members of an industry-wide retirement fund to assess how standard saving motives, pension defaults, investment returns, preferences, and frictions interact to drive lifetime savings patterns across major asset classes. Our results show considerable heterogeneity in motivations to save. First, we find that consumption smoothing is the main driver of financial and housing asset accumulation. For pension wealth, its role is mitigated by default switching costs, with costless switching encouraging pension savings at the expense of financial wealth, but not housing. In fact, we find higher pension assets drive up housing throughout the lifecycle, as people - anticipating wealthier retirement and to avoid potentially larger housing adjustment costs later on - lock in higher housing investments early. Second, we allow participants to treat bequests as luxury goods. This motivates higher defined contribution take-up and riskier portfolios but only modest boosts to mid-life financial savings. Third, savings made as a precaution against earnings risks have similar effects to bequests on pension assets, although they do not translate into wealth dynamics. Fourth, if people cannot borrow against home equity using mortgage redraws they will hold higher financial savings. This will ultimately come at the expense of pension balances more than housing wealth.

Keywords: lifetime savings, portfolio choice, income risk, defaults, method of moments

JEL Classification: H8, J26, J32

Suggested Citation

Dobrescu, Loretti Isabella and Shanker, Akshay and Bateman, Hazel and Newell, Ben Rhodri and Thorp, Susan, Eggs and Baskets: Lifecycle Portfolio Dynamics (March 29, 2022). UNSW Business School Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=4069226 or http://dx.doi.org/10.2139/ssrn.4069226

Loretti Isabella Dobrescu (Contact Author)

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

Akshay Shanker

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

Hazel Bateman

UNSW Sydney, CEPAR ( email )

High Street
Sydney, NSW 2052
Australia

Ben Rhodri Newell

Independent

Susan Thorp

The University of Sydney Business School ( email )

Abercrombie Building
H70
The University Of Sydney, NSW 2006
Australia
0290366354 (Phone)

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