How Much Risk is Acceptable?

Alex Golub-SassAlicia H. Munnell Anthony Webb

IB#8-20

The brief’s key findings are:

  • The financial crisis suggests the need for a new universal tier of retirement saving to supplement Social Security and 401(k)s.
  • If the tier were a defined contribution system, asset levels would vary with market returns and payouts with interest rates.
  • Replacement rates would fluctuate as much as 25 percentage points – even if everyone invested in an identical target-date fund.
  • An alternative is to guarantee a fixed return, but this return will almost always be lower than that under a target-date fund, and guarantees are not costless.