Retirement Saving with Contribution Payments and Labor Income as a Benchmark for Investments

Abstract

In this paper we study the retirement saving problem from the point of view of a plan sponsor, who makes contribution payments for the future retirement of an employee. The plan sponsor considers the employee's labor income as investment-benchmark in order to ensure the continuation of consumption habits after retirement. We demonstrate that the demand for risky assets increases at low wealth levels due to the contribution payments. We quantify the demand for hedging against changes in wage growth and find that it is relatively small. We show that downside-risk measures increase risk-taking at both low and high levels of wealth.

Keywords: Retirement Saving, Optimal Asset Allocation, Discrete-Time Finance, Dynamic Programming

JEL Classification: G11, G23