An Assessment of Life-Cycle Funds

Mauricio Soto (), Robert Triest, Alex Golub-Sass and Francesca Golub-Sass

Working Papers, Center for Retirement Research at Boston College from Center for Retirement Research

Abstract: Life-cycle funds offer an intuitive approach to retirement investing. Despite their intuitive appeal, the empirical and theoretical support for life-cycle funds is mixed. We examine life-cycle funds using dynamic optimization techniques to evaluate the optimal asset allocation over the life cycle. In our modeling we introduce a utility function that accounts for the individual’s taste for bearing risk and analyze the role of human capital on allocation decisions. The simulations generally support the use of target retirement date funds once human capital is taken into account. Investment fees, however, could potentially erode any increased asset levels that life-cycle funds create. Ultimately, an appropriate asset allocation depends on individuals’ objectives and the opportunities available in financial markets.

Pages: 37 pages
Date: 2008-04, Revised 2008-05
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