Long Run Asset Allocation for Retirement Savings

Abstract

The authors examine two of the most important factors in accumulating the necessary funds for retirement: asset allocation and asset location. They find that an all-bond strategy is difficult to rationalize even for the most risk-averse individuals. A portfolio mix of 40–60 percent stocks and the remainder in bonds makes sense for those who are strongly risk averse, and mildly risk-averse individuals are best off with 70–100 percent in stocks. Because pensions dominate conventional savings accounts, their use should be maximized. For people whose federal income tax rate exceeds 15 percent and who cannot place all their retirement savings in pension accounts, the authors find that holding municipal bonds in conventional accounts is better than holding corporate bonds in pension accounts. Furthermore, the typical actively managed equity mutual fund gains more from being in a pension account than in a typical bank fund.