Financial Risk, Retirement, Saving and Investment

Published: 2006
Project ID: UM06-12


How does the riskiness of returns to retirement saving affect retirement, saving, and the optimal portfolio mix? The proposed project will utilize a dynamic, stochastic, structural econometric model of retirement, saving, and optimal portfolio mix to analyze how risky returns affect the paths of each of these important outcomes. Tables will be generated relating retirement, saving, and investment behavior to the size of investment risk, and to outcomes emphasized by financial planners, such as the likelihood of exhausting assets during retirement. In addition, we will consider how one’s investment strategy should change with age in light of the availability of Social Security, with the relative importance of Social Security as a source of retirement income differing for those with different histories of covered incomes. Finally, we will consider the implications for private investment strategies of possible reforms to Social Security, including the adoption of personal accounts that may have varying mixes of equities and bonds.