Missing the Target? Retirement Expectations and Target Date Funds
78 Pages Posted: 12 Apr 2024
There are 2 versions of this paper
Missing the Target? Retirement Expectations and Target Date Funds
Date Written: March 18, 2024
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: Suggested Citation