How persistent low expected returns alter optimal life cycle saving, investment, and retirement behavior

Vanya Horneff, Raimond Maurer and Olivia Mitchell

No 190, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: This Chapter explores how an environment of persistent low returns influences saving, investing, and retirement behaviors, as compared to what in the past had been thought of as more "normal" financial conditions. Our calibrated lifecycle dynamic model with realistic tax, minimum distribution, and Social Security benefit rules produces results that agree with observed saving, work, and claiming age behavior of U.S. households. In particular, our model generates a large peak at the earliest claiming age at 62, as in the data. Also in line with the evidence, our baseline results show a smaller second peak at the (system-defined) Full Retirement Age of 66. In the context of a zero-return environment, we show that workers will optimally devote more of their savings to non-retirement accounts and less to 401(k) accounts, since the relative appeal of investing in taxable versus tax-qualified retirement accounts is lower in a low return setting. Finally, we show that people claim Social Security benefits later in a low interest rate environment.

Keywords: dynamic portfolio choice; 401(k) plan; saving; Social Security claiming age; retirement income; minimum distribution requirements; tax (search for similar items in EconPapers)
JEL-codes: D14 D91 G11 G22 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-age and nep-dge
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Working Paper: How Persistent Low Expected Returns Alter Optimal Life Cycle Saving, Investment, and Retirement Behavior (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:190

DOI: 10.2139/ssrn.3076397

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