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Optimal retirement savings over the life cycle: A deterministic analysis in closed form

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  • Fischer, Marcel
  • Jensen, Bjarne Astrup
  • Koch, Marlene

Abstract

In this paper, we explore the life cycle consumption-savings problem in a stylized model with a risk-free investment opportunity, a tax-deferred retirement account, and deterministic labor income. Our closed form solutions show that liquidity constraints can be severely binding; in particular in situations with a high growth rate of labor income, in which retirement saving is optimally postponed. With a tax-deferred account, it is always optimal to save in this (illiquid) account first before saving in the (liquid) taxable account in order to satisfy the needs for consumption smoothing. The optimal retirement savings pattern is far from the widespread practice of contributing a fixed fraction of current labor income over the working life to a tax-deferred environment.

Suggested Citation

  • Fischer, Marcel & Jensen, Bjarne Astrup & Koch, Marlene, 2023. "Optimal retirement savings over the life cycle: A deterministic analysis in closed form," Insurance: Mathematics and Economics, Elsevier, vol. 112(C), pages 48-58.
    • Handle: RePEc:eee:insuma:v:112:y:2023:i:c:p:48-58
    DOI: 10.1016/j.insmatheco.2023.05.010
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    References listed on IDEAS

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    More about this item

    Keywords

    Retirement saving; Tax-deferred investing; Borrowing constraints; Labor income; Analytical solution;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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