How unobservable bond positions in retirement accounts affect asset allocation

Many tax‐codes around the world allow for special taxable treatment of savings in retirement accounts (RAs). In particular, profits in RAs are usually tax exempt which allows investors to enhance after‐tax returns on assets. While the existing literature on asset location shows that risk‐free bonds are usually the preferred asset to hold in a RA, we explain how the tax exemption of profits in RAs affects private investors’ overall asset allocation. We show that total final wealth can be decomposed into what the investor would have earned in a taxable account and what is due to the tax exemption of profits in the RA. The tax savings due to the tax exemption of profits in RAs are similar to an implicit bond holding. As expected future tax savings decrease in time, so does the investor's equity exposure.