Investing over the Life Cycle with Long-run Labor Income Risk
Throughout life, people make saving and spending decisions. Moreover, they choose how to allocate their savings among assets that have predictable but low returns, like bonds, and assets that are riskier but could yield higher returns, like stocks. Choices that are made when individuals are relatively young will have large implications for their standard of living in retirement, when much of their income is likely to come from savings. Private pension plans and the Social Security system face similar decisions about how best to invest assets for their clients.