This chapter explores how an environment of persistent low returns influences saving, investing, and retirement behaviors, compared to what in the past had been conceived of as ‘normal’ financial conditions. Using a calibrated life cycle dynamic model with realistic tax, minimum distribution, and social security benefit rules, we can mimic the large peak at the earliest claiming age at 62 that is seen in the data. Also in line with the evidence, our baseline results show a smaller second peak at the (system-defined) Full Retirement Age of 66. In the context of a zero-return environment, we show that workers will optimally devote more of their savings to non-retirement accounts and less to 401(k) accounts, since the relative appeal of investing in taxable versus tax-qualified retirement accounts is lower in a low return setting. Finally, we show that people claim social security benefits later in a low interest rate environment.
How Persistent Low Expected Returns Alter Optimal Life Cycle Saving, Investment, and Retirement Behavior