Thread by @KunalSSachdeva

‼️ New Working Paper ‼️

Target date funds assume that investors accurately predict their future retirement. Is this true? We find that investors have biases in their estimated long-run labor participation.

papers.ssrn.com/sol3/papers.cf…

Here is a summary. #econtwitter

1/n

Getting this assumption is important for future retirees -- Target-date funds manage $1.6 trillion, making up 27% of 401(k) market share

We investigate this using nationally representative data from nearly three decades.

It is clear that long-run estimates tend to underestimate future labor participation. Said differently, respondents work longer than they originally expected.

But how does this relate to Target Date Funds?

Believing you will retire sooner puts you into a portfolio with too low of a risk level. See below a sample glide path from Vanguard

What are the costs of these errors?

Our model suggests that subjective beliefs lead to lower: levels of consumption (A), portfolio risk (B), and early retirement (C)

Calibrations suggest that errors in expectations compound over time, costing the median respondent 4% of total wealth, equivalent to 0.2% a year.

This is equivalent to roughly 30% of the average annual management fees charged by target-date funds.

Check out the full paper with Byeong-Je An (@NanyangBizSch)

papers.ssrn.com/sol3/papers.cf…