Document Type
Working Paper
Date of this Version
9-1-2017
Abstract
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 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
JEL Code
G11, G22, D14, D91
Working Paper Number
WP2017-09
Copyright/Permission Statement
All findings, interpretations, and conclusions of this paper represent the views of the author(s) and not those of the Wharton School or the Pension Research Council. © 2017 Pension Research Council of the Wharton School of the University of Pennsylvania. All rights reserved.
Date Posted: 13 February 2019
Comments
The published version of this Working Paper may be found in the 2018 publication: How Persistent Low Returns Will Shape Saving and Retirement.