How Much Risk is Acceptable?

Source: Alicia H. Munnell, Anthony Webb, and Alex Golub-Sass, Center for Retirement Research at Boston College, Issue in Brief, IB#8-20, November 2008

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 could fluctuate as much as 30 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.

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