How Important Is Asset Allocation to Retirement Security?

Financial planners devote considerable energy to advising Americans how to invest their retirement savings. Of course, wise investment of one’s hard-earned money is important. But the fact is that many Americans have saved very little – the typical house-hold approaching retirement has less than $100,000 in 401(k) and other financial assets. Thus, for many people, even perfect investing is unlikely to have a significant effect on their well-being in retirement. Fortunately, people have a number of other levers that can affect their retirement security. And these strategies – unlike the stock market – are within the individual’s control: working longer, using a reverse mortgage to access home equity, and controlling con-sumption when the kids leave home. Moreover, even for many with substantial assets, these non-financial levers may be as powerful as asset allocation in attain-ing retirement security. This brief, adapted from a recent paper, compares the non-financial levers to asset allocation to deter-mine the relative power of each strategy in boosting retirement preparedness. The first section describes the potential benefits of the non-financial strategies. The second section summarizes the methodology used to compare their effectiveness with asset al-location. The third section presents the results. The conclusion is that, for the population as a whole, asset allocation is less potent than the alternatives, particularly working longer. And, even for those with substantial financial assets, it is less important than one would expect.