Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice

Abstract

We challenge two tenets of lifecycle investing: (i) diversify across stocks and bonds and (ii) reduce equity allocations with age.  An optimal lifetime allocation of 33% domestic stocks, 67% international stocks, 0% bonds, and 0% bills vastly outperforms age-based, stock-bond strategies in building wealth, supporting retirement consumption, preserving capital, and generating bequests.  Our lifecycle model preserves crucial time-series and cross-sectional dependencies in asset returns and addresses small sample issues in US data.  Our investors prefer diversifying with international stocks, not bonds.  Target-date fund investors need 61% more pre-retirement savings to match the all-equity strategy’s expected utility over retirement consumption and bequest.

Keywords: Lifecycle asset allocation, Retirement savings, Target-date funds, Long-horizon returns

JEL Classification: C15, D14, G11, G17, G51