What is at Stake when Determining Lifetime Asset Allocation?

This paper examines the effects of deviating from the optimal life-cycle asset allocation. The likely magnitude of sub-optimality is gauged through an analysis of differences between available life-cycle funds. The motivation is that due to search costs, the complexity of the decision problem and other factors, investors may not choose the asset allocation profile best suited to them. The associated utility losses are quantified using a model of lifetime consumption and portfolio choice. The results suggest that these utility losses are modest. In many cases, they are smaller than the loss which arises if the return on financial assets is reduced by 0.3% per annum. The analysis helps to identify the most important decisions when saving for retirement, and to balance the costs and benefits of customising saving products. (JEL D91, G11