Center for Retirement Research
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TITLE:
Optimal Retirement Asset Decumulation Strategies: The Impact of Housing Wealth
AUTHOR(S):
Wei Sun
Robert Triest
Anthony Webb
DOCUMENT TYPE: Article
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Executive summary
ABSTRACT:
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 use VARs to estimate the relationship between the returns on housing, stocks, and bonds, and use simulation techniques to investigate a variety of decumulation strategies incorporating reverse mortgages. Under a wide variety of assumptions, we find that the average household would be as much as 33 percent better off taking a reverse mortgage as a lifetime income relative to what appears to be the most common strategy of delaying until financial wealth is exhausted and then taking a line of credit. It would be as much as 62 percent better off relative to not taking a reverse mortgage at all. Housing wealth displaces bonds in optimal portfolios, making the low rate of participation in the stock market even more of a puzzle.