Wealth Accumulation and Portfolio Choice with Taxable and Tax-Deferred Accounts

56 Pages Posted: 11 May 2005

See all articles by Alexander Michaelides

Alexander Michaelides

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Francisco Gomes

London Business School

Valery Polkovnichenko

Federal Reserve Board - Divison of Research and Statistics

Date Written: January 2005

Abstract

We calibrate a life-cycle model with uninsurable labor income risk and borrowing constraints to match wealth accumulation and portfolio allocation profiles of direct and indirect stockholders in both taxable and tax-deferred accounts. Tax-deferred accounts generate an increase in wealth accumulation that is larger for wealthier households. Furthermore, while the cost of following a fixed contribution rate over the life-cycle is small, the optimal rate can differ substantially across households, and the welfare losses from choosing the wrong one can be substantial. Finally, the welfare gain from having access to a tax-deferred account ranges from less than 0.1% to 11.5%, depending on the preference parameters.

Keywords: Portfolio choice, tax-deferred accounts, retirement savings, liquidity constraints, uninsurable labor income risk

JEL Classification: G11

Suggested Citation

Michaelides, Alexander and Gomes, Francisco and Polkovnichenko, Valery, Wealth Accumulation and Portfolio Choice with Taxable and Tax-Deferred Accounts (January 2005). CEPR Discussion Paper No. 4852. Available at SSRN: https://ssrn.com/abstract=721586

Alexander Michaelides (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Francisco Gomes

London Business School ( email )

Institute of Finance and Accounting
Sussex Place - Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 (Phone)
+44 20 7724 3317 (Fax)

HOME PAGE: http://www.london.edu/faculty/fgomes

Valery Polkovnichenko

Federal Reserve Board - Divison of Research and Statistics ( email )

20th and C Streets, NW
Washington, DC 20551
United States

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