Traditional-style vs. Roth-style 401k Plans: Calculating the Optimal Savings Rate for Consumption-smoothing

Open Access
Author:
Bader, David Andrew
Area of Honors:
Finance
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • James Alan Miles, Thesis Supervisor
  • James Alan Miles, Honors Advisor
  • Louis Gattis Jr., Faculty Reader
Keywords:
  • finance
  • retirement
  • savings
  • 401k
  • consumption-smoothing
Abstract:
The question of how much to save for retirement has been hotly debated in the world of finance for years now. With a struggling economy and an uncertain future, this issue has never been more relevant than right now. It has become a widely-accepted belief that the goal of an individual saving for retirement should be to achieve consumption-smoothing throughout his/her lifetime, ensuring that the same quality of life enjoyed in working years can be experienced in retirement. This thesis aims to determine an optimal savings rates for individuals in various financial circumstances by using a model constructed in Microsoft Excel. The optimal savings rate is based on the idea of consumption-smoothing, which states that an individual will maintain the same consumption level throughout an entire lifetime. Additionally, the advantages and disadvantages of Roth-style versus traditional-style savings accounts will be considered, and a recommendation will be given as to which method is better for each scenario. In the end, this paper will help to provide a sense of security by reassuring individuals that they are indeed saving enough to retire comfortably.