Waiting to Borrow From a 457(b) Plan
Alex Garivaltis

TL;DR
This paper models the decision-making process for timing a loan from a retirement plan like a 457(b), balancing the benefits of waiting for higher external asset returns against the growth of the retirement fund.
Contribution
It introduces a novel optimal stopping framework for self-loans from retirement accounts, deriving cutoff rules and analyzing stochastic asset returns.
Findings
Optimal cutoff rules depend on yield disparities and loan parameters.
Horizon-free policies are simple and robust for practical use.
Stochastic returns create a wait region with mean-variance trade-offs.
Abstract
This paper formulates and solves the optimal stopping problem for a loan made to one's self from a tax-advantaged retirement account such as a 401(k), 403(b), or 457(b) plan. If the plan participant has access to an external asset with a higher expected rate of return than the investment funds and indices that are available within the retirement account, then he must decide how long to wait before exercising the loan option. On the one hand, taking the loan quickly will result in many years of exponential capital growth at the higher (external) rate; on the other hand, if we wait to accumulate more funds in the 457(b), then we can make a larger deposit into the external asset (albeit for a shorter period of time). I derive a variety of cutoff rules for optimal loan control; in general, the investor must wait until he accumulates a certain amount of money (measured in contribution-years)…
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Taxonomy
TopicsFinancial Markets and Investment Strategies · Economic theories and models · Stochastic processes and financial applications
