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

JEL(s): G11

Programme Areas: Financial Economics , International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP4852.asp

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.