DP4852 Wealth Accumulation and Portfolio Choice with Taxable and Tax-Deferred Accounts

Author(s): Francisco J Gomes, Alexander Michaelides, Valery Polkovnichenko
Publication Date: January 2005
Keyword(s): liquidity constraints, portfolio choice, retirement savings, tax-deferred accounts, uninsurable labour income risk
JEL(s): G11
Programme Areas: International Macroeconomics, Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4852

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.