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An Optimizing Framework for the Glide Paths of Lifecycle Asset Allocation Funds

Author

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  • Wade D. Pfau

    (National Graduate Institute for Policy Studies)

Abstract

In choosing a glide path strategy for asset allocation over their working lives, retirement savers face a tradeoff between the higher expected wealth provided by strategies that maintain or increase equity holdings over time, against the greater potential security offered from shifting into more conservative assets. We quantify this tradeoff with an expected utility framework for our simulated distribution of target date wealth accumulations under a variety of lifecycle, fixed, and contrarian glide path strategies. We find justification for the lifecycle strategy for savers with very reasonable amounts of risk aversion, and we also provide guidance about utility-maximizing glide paths.

Suggested Citation

  • Wade D. Pfau, 2009. "An Optimizing Framework for the Glide Paths of Lifecycle Asset Allocation Funds," GRIPS Discussion Papers 09-16, National Graduate Institute for Policy Studies.
    • Handle: RePEc:ngi:dpaper:09-16
    as

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    File URL: https://grips.repo.nii.ac.jp/?action=repository_action_common_download&item_id=1016&item_no=1&attribute_id=20&file_no=1
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    References listed on IDEAS

    as
    1. Samih Antoine Azar, 2006. "Measuring relative risk aversion," Applied Financial Economics Letters, Taylor & Francis Journals, vol. 2(5), pages 341-345.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. "Dynamic Allocation Strategies for Distribution Portfolios: Determining the Optimal Distribution Glide Path"
      by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2011-07-18 04:58:00
    2. Should Retirees Increase Stock Allocations as they get Older and Older?
      by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2011-07-21 07:38:00

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    Cited by:

    1. Kumara, Ajantha Sisira & Pfau, Wade Donald, 2011. "Lifecycle and fixed portfolio allocation strategies: a performance comparison for emerging market countries," MPRA Paper 31389, University Library of Munich, Germany, revised 10 Jun 2011.

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    More about this item

    Keywords

    lifecycle; target date; retirement planning; glide paths;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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