Optimal Retirement Asset Decumulation Strategies: The Impact of Housing Wealth
AbstractA considerable literature examines the optimal decumulation of financial wealth in retirement. We extend this research to incorporate housing, which comprises the majority of most households non-pension wealth.We estimate the relationship between the returns on housing, stocks, and bonds, and simulate a variety of decumulation strategies incorporating reverse mortgages. We show that homeowners reversionary interest, the amount that can be borrowed through a reverse mortgage, is a surprisingly risky asset. Under our baseline assumptions, we find that the average household would be as much as 24 percent better off taking a reverse mortgage as a lifetime income relative to what appears to be the most common strategy: delaying tapping housing wealth until financial wealth is exhausted and then taking a line of credit. In addition, we show that housing wealth displaces bonds in optimal portfolios, making the low rate of participation in the stock market even more of a puzzle.
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Bibliographic InfoArticle provided by De Gruyter in its journal Asia-Pacific Journal of Risk and Insurance.
Volume (Year): 3 (2008)
Issue (Month): 1 (September)
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Web page: http://www.degruyter.com
Other versions of this item:
- Wei Sun & Robert Triest & Anthony Webb, 2006. "Optimal Retirement Asset Decumulation Strategies: The Impact of Housing Wealth," Working Papers, Center for Retirement Research at Boston College wp2006-22, Center for Retirement Research, revised Nov 2006.
- Wei Sun & Robert K. Triest & Anthony Webb, 2007. "Optimal retirement asset decumulation strategies: the impact of housing wealth," Public Policy Discussion Paper 07-2, Federal Reserve Bank of Boston.
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