Tactical target date funds

Gomes, F, Michaelides, A and Zhang, Y (2022) Tactical target date funds. Management Science, 68 (4). pp. 3047-3070. ISSN 0025-1909

Abstract

We propose target date funds modified to exploit stock return predictability driven by the variance risk premium. The portfolio rule of these tactical target date funds (TTDFs) is extremely simplified relative to the optimal one, making it easy to implement and to communicate to investors. We show that saving for retirement in TTDFs generates economically large welfare gains, even after we introduce turnover restrictions and transaction costs, and after taking into account parameter uncertainty. This predictability also appears to be uncorrelated with individual household risk, suggesting that households are in a prime position to exploit it.