Saving for retirement while having more nights with peaceful sleep

We evaluate the fit of target-date funds (TDFs) as the main retirement savings instrument for the utility-maximizing investor who becomes more risk averse as she gets older. Using bootstrapping simulations, we show that TDFs can provide higher expected utility than the alternative lifestyle strategies. With loss aversion incorporated in the model, we still find that the optimal lifecycle strategy over time leads to higher expected utility than the best lifestyle strategy. Therefore, TDFs are preferable to the utility-maximizing investor. However, lifecycle strategies are not one-size-fits-all solution and investor’s risk tolerance has to be considered when selecting TDF funds.