Optimal Retirement Asset Decumulation Strategies: The Impact of Housing Wealth
Public
Policy Discussion Paper No. 07-2
by Wei Sun, Robert K. Triest, and Anthony Webb
A considerable literature examines the optimal decumulation of financial wealth in retirement. We extend this line of 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, the results show that housing wealth displaces bonds in optimal portfolios, making the low rate of participation in the stock market even more of a puzzle.
JEL classification codes: D14, D91, G11, J14
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