The Optimal Lifecycle when investing contributions in defined contributions pension plans in different asset classes

Currently there is a huge shift from defined benefit pensions to defined contribution pensions. In defined contribution pensions the contributions are invested following a lifecycle strategy. This paper investigates the optimal lifecycle within a set of different lifecycles when investing contributions in defined contribution pension plans in stocks, real estate and bonds. For this purpose economic state, asset, interest rate, inflation and salary data are analysed for the period April 2005 until April 2017. The analysis and 42 years ahead simulation are done using a Markov switching model in combination with a VARX model and a CIR model. In total 10,000 different paths are simulated and for each path 13 different lifecycles are analysed. The lifecycles result in a for inflation corrected monthly pension and these are analysed using multiple ranking criteria. This research finds that within the 13 analysed lifecycles the optimal lifecycle in terms of expected utility and chance of reaching a pension of at least 75% of the average income is a lifecycle fully invested in stocks.