Optimal Retirement Asset Decumulation Strategies: The Impact of Housing Wealth

Wei Sun; Robert K. Triest; Anthony Webb

doi:10.2202/2153-3792.1032

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Optimal Retirement Asset Decumulation Strategies: The Impact of Housing Wealth

Wei Sun , Robert K. Triest and Anthony Webb

Published/Copyright: September 1, 2008

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From the journal Asia-Pacific Journal of Risk and Insurance Volume 3 Issue 1

A 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 homeowner’s 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.

Published Online: 2008-9-1

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https://doi.org/10.2202/2153-3792.1032