I have no idea what all the following is saying and I have not a clue what that formula says. I do know that many academics and economists do not live in the real world. And I know most people are like me and don’t know what all this means.
This appears as obtuse as the argument to maximize lifetime Social Security benefits as opposed to the maximum monthly benefit when you most need the money.
“optimizing behavior in a life cycle model?” Give me a break. Worry more about understanding compounding interest first.
The real danger lies in creating the impression saving for retirement can wait. I can just see the headlines. Ah, here’s one now😢
Remember, I didn’t write the following🙄
🔲 We examine optimal retirement saving for young adults in a life cycle model. We find that for liquidity-constrained young adults who anticipate significant earnings growth, optimal retirement saving is zero. Specifically, we find that with a plausible wage profile for college-educated workers, retirement saving does not begin until the late 30s or early 40s, even with standard employer matching. In fact, inducing workers in their mid 20s to participate in a retirement plan requires employer match rates of more than 1000 percent. In contrast, workers facing a flat wage profile begin saving much earlier in life. We also find that participating may be optimal for younger workers facing steeper wage profiles if they anticipate switching jobs and cashing out after 1-2 years. Our results suggest that automatically enrolling workers, regardless of age or anticipated future earnings, in defined contribution plans is not consistent with optimizing behavior in a life cycle model.
a. Basic Problem
We begin with a standard life cycle model in which an individual who begins working life at time 0 and live for up to 𝑇𝑇 years. Labor is supplied inelastically through an exogenous retirement age, at which point Social Security is claimed. Each period, the individual has the opportunity to save a in a tax-deferred employer-sponsored retirement account (with an employer match) and in a taxable brokerage account. The individual solves the following problem:🔲