Citation

Discussion Paper Details

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Title: Wealth Accumulation and Portfolio Choice with Taxable and Tax-Deferred Accounts

Author(s): Francisco J Gomes, Alexander Michaelides and Valery Polkovnichenko

Publication Date: January 2005

Keyword(s): liquidity constraints, portfolio choice, retirement savings, tax-deferred accounts and uninsurable labour income risk

Programme Area(s): Financial Economics and International Macroeconomics

Abstract: We calibrate a life-cycle model with uninsurable labour income risk and borrowing constraints to match wealth accumulation and portfolio allocation profiles of direct and indirect stockholders in both taxable and tax-deferred accounts. Tax-deferred accounts generate an increase in wealth accumulation that is larger for wealthier households. Furthermore, while the cost of following a fixed contribution rate over the life cycle is small, the optimal rate can differ substantially across households, and the welfare losses from choosing the wrong one can be substantial. Finally, the welfare gain from having access to a tax-deferred account ranges from less than 0.1% to 11.5%, depending on the preference parameters.

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Bibliographic Reference

Gomes, F, Michaelides, A and Polkovnichenko, V. 2005. 'Wealth Accumulation and Portfolio Choice with Taxable and Tax-Deferred Accounts'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4852