Optimal Retirement Asset Decumulation Strategies: The Impact of Housing Wealth

Wei Sun (), Robert Triest and Anthony Webb ()

Asia-Pacific Journal of Risk and Insurance, 2008, vol. 3, issue 1, 29

Abstract: 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.

Date: 2008
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Working Paper: Optimal retirement asset decumulation strategies: the impact of housing wealth (2007)
Working Paper: Optimal Retirement Asset Decumulation Strategies: The Impact of Housing Wealth (2006)
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DOI: 10.2202/2153-3792.1032

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