Working Paper: NBER ID: w7007
Authors: John B. Shoven
Abstract: This paper addresses two important parts of the problem of saving for retirement. They are (1) if assets are to be held in both conventional (and hence taxable) accounts and pension accounts, which assets should be held in each? and, (2) if the investor is substantially risk averse, what is the optimal mix of stocks and bonds for retirement saving? It is shown that the conventional wisdom of first placing heavily taxed corporate bonds in the pension account (and holding equity mutual funds outside the account) is the wrong asset location strategy for most people and most circumstances. It is also shown that even very risk averse retirement savers should allocate more than half of their portfolio to stocks if asset returns have the same means, variances, and covariances as have been observed over the past seventy years.
Keywords: pension accounts; savings; asset allocation; retirement wealth; tax implications
JEL Codes: D14; H24; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Asset location (G19) | Retirement wealth (J26) |
| Holding municipal bonds in a conventional account (H74) | Retirement wealth (J26) |
| Stocks held in a pension account (G23) | Retirement wealth (J26) |
| Strategic asset placement (G11) | Wealth accumulation (E21) |
| Asset location strategies (G11) | Efficiency gains in retirement savings (D14) |
| Asset location (G19) | Consumable wealth at retirement (D14) |