Optimal Life-Cycle Investing with Flexible Labor Supply: A Welfare Analysis of Life-Cycle Funds

  title={Optimal Life-Cycle Investing with Flexible Labor Supply: A Welfare Analysis of Life-Cycle Funds},
  author={Francisco J. Gomes and Laurence J. Kotlikoff and Luis M. Viceira},
  journal={Capital Markets: Asset Pricing \& Valuation},
We investigate optimal consumption, asset accumulation and portfolio decisions in a realistically calibrated life-cycle model with flexible labor supply. Our framework allows for wage rate uncertainly, variable labor supply, social security benefits and portfolio choice over safe bonds and risky equities. Our analysis reinforces prior findings that equities are the preferred asset for young households, with the optimal share of equities generally declining prior to retirement. However, variable… 

Extending Life Cycle Models of Optimal Portfolio Choice: Integrating Flexible Work, Endogenous Retirement, and Investment Decisions with Lifetime Payouts

This paper derives optimal life cycle portfolio asset allocations as well as annuity purchases trajectories for a consumer who can select her hours of work and also her retirement age. Using a

A Note on Life-Cycle Funds

Life-cycle or target-date funds have been gaining tremendous market share and were recently set as default choice of asset allocation in numerous defined contribution schemes or related old age

Optimal Portfolio Choice over the Life-Cycle with Flexible Work, Endogenous Retirement, and Lifetime Payouts

This paper derives optimal lifecycle asset allocations for consumers who select work hours and retirement ages given uncertain labor income and investment returns. These shocks shape retirement and

How to Invest Over the Life-Cycle in the Presence of Background Risk?

This paper investigates the impact of health and labor income risk on portfolio choice in a realistically calibrated life-cycle model. The model shows that health risk reduces the desired exposure to

Labor Income and the Design of Default Portfolios in Mandatory Pension Systems: An Application to Chile

Governments often impose choices regarding the levels of savings and the composition of the portfolio of assets in mandatory pension systems; either the share of pay-as-you-go vs. financial assets or

Asset Allocation Over the Life Cycle: How Much Do Taxes Matter?

We study the welfare effect of tax-optimizing portfolio decisions in a life cycle model with unspanned labor income and realization-based capital gain taxation. For realistic parameterizations of our

Life-cycle funds: Much Ado about Nothing?

The core idea of life-cycle funds or target-date funds is to decrease the fund's equity exposure and conversely increase its bond exposure towards the fund's target date. Such funds have been gaining



Optimal Portfolio Choice for Long-Horizon Investors with Nontradable Labor Income

This paper analyzes optimal portfolio decisions of long-horizon investors with undiversifiable labor income risk and exogenous expected retirement and lifetime horizons. It shows that the fraction of

Life-Cycle Funds

This paper reviews recent advances in academic models of asset allocation for long-term investors, and explores their implications for the design of investment products that help investors save for

Optimal Life-Cycle Asset Allocation: Understanding the Empirical Evidence

We show that a life-cycle model with realistically calibrated uninsurable labor income risk and moderate risk aversion can simultaneously match stock market participation rates and asset allocation

Consumption and Portfolio Choice over the Life Cycle

This article solves a realistically calibrated life cycle model of consumption and portfolio choice with non-tradable labor income and borrowing constraints. Since labor income substitutes for

Optimal Asset Location and Allocation with Taxable and Tax-Deferred Investing

We investigate optimal intertemporal asset allocation and location decisions for investors making taxable and tax-deferred investments. We show a strong preference for holding taxable bonds in the

Asset Allocation with Endogenous Labor Income: The Case of Incomplete Markets

This paper investigates optimal consumption and portfolio decisions with nontradable labor income and flexible labor supply. This paper considers risky labor income in a setting where wage income and

Insuring Consumption Using Income-Linked Assets

Shiller (2003) and others have argued for the creation of financial instruments that allow households to insure risks associated with their lifetime labor income. In this paper, we argue that while

Self-insurance in a life-cycle model of labour supply and savings