How Persistent Low Expected Returns Alter Optimal Life Cycle Saving, Investment, and Retirement Behavior / Vanya Horneff, Raimond Maurer, Olivia S. Mitchell.

Format:

Book

Author/Creator:

Horneff, Vanya.

Contributor:

National Bureau of Economic Research.

Maurer, Raimond.

Mitchell, Olivia S.

Series:

Working Paper Series (National Bureau of Economic Research) no. w24311.

NBER working paper series no. w24311

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2018.

Summary:

This paper 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 higher in a low return setting. Finally, we show that people claim Social Security benefits later in a low interest rate environment.

Notes:

Print version record

February 2018.