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

Abstract

We calibrate a life-cycle model with uninsurable labor 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.

Keywords: Portfolio choice, tax-deferred accounts, retirement savings, liquidity constraints, uninsurable labor income risk

JEL Classification: G11