Eggs and Baskets: Lifecycle Portfolio Dynamics

60 Pages Posted: 8 Apr 2022 Last revised: 21 Aug 2023

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

Housing and pension wealth are two major contributors to the quality of old-age provision. Here we study the interplay between these two asset classes using the impact of changes in saving incentives on wealth accumulation across the lifetime. To do so, we build and estimate a dynamic lifecycle model of saving and portfolio choice featuring risky earnings, lumpy housing with collateralized borrowing, and financial assets inside and outside pension plans. Through counterfactual simulations, we find complementarity from pensions to housing, and a substitutability from housing to pensions. Specifically, incentivizing pension savings increases housing, with homeownership and mortgaging occurring earlier and at higher levels, in anticipation of a prosperous retirement. In contrast, more attractive housing reduces liquidity and displaces pension savings, while tightening collateral constraints reduces both pension and housing investments. The mechanism behind this asymmetry, and especially how it unfolds across genders, stems from behavioral and housing frictions along with the partial liquidity offered by collateralized borrowing that jointly determine the timing of wealth accumulation. In this respect, we show that: (i) changes to pension plan architecture can significantly narrow the gender gap in wealth, (ii) better pension and housing conditions increase overall wealth without any further moder- ating effects on gender-wealth inequality, and (iii) higher market risk and tighter borrowing constraints widen the gap.

Keywords: lifecycle savings, portfolio choice, pensions, housing, 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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