How Important is Asset Allocation to Financial Security in Retirement?

Center for Retirement Research at Boston College Working Paper No. 2012-13

28 Pages Posted: 13 Apr 2012  

Alicia H. Munnell

Boston College - Center for Retirement Research

Natalia Orlova

Boston College, Center for Retirement Research

Anthony Webb

Boston College - Center for Retirement Research

Date Written: April 13, 2012

Abstract

Financial advice tends to focus on financial assets, but other levers may be more important for most households. This paper proceeds in three stages. The first section reports a simple Excel spreadsheet exercise that provides a stylized example of the tradeoff between returns and time spent in the labor force. The second section uses data from the Health and Retirement Study (HRS) on pre-retirees aged 51-64 to see how the gap between retirement needs and retirement resources is affected by working longer, taking out a reverse mortgage, controlling spending, and shifting all assets to equities with no risk. The third section uses a simple dynamic programming model to calculate a risk-adjusted measure of the value for the average household of moving from a typical conservative portfolio to an optimal portfolio. The answer from all three exercises is the same: the focus on asset allocation is misplaced.

Keywords: labor force, Health and Retirement Study, pre-retirees, retirement, mortgage

JEL Classification: J26, J21

Suggested Citation

Munnell, Alicia H. and Orlova, Natalia and Webb, Anthony, How Important is Asset Allocation to Financial Security in Retirement? (April 13, 2012). Center for Retirement Research at Boston College Working Paper No. 2012-13. Available at SSRN: https://ssrn.com/abstract=2039385 or http://dx.doi.org/10.2139/ssrn.2039385

Alicia Munnell (Contact Author)

Boston College - Center for Retirement Research ( email )

Fulton Hall 550
Chestnut Hill, MA 02467
United States
617-552-1762 (Phone)

Natalia Orlova

Boston College, Center for Retirement Research ( email )

Boston, MA
United States

Anthony Webb

Boston College - Center for Retirement Research ( email )

Fulton Hall 550
Chestnut Hill, MA 02467
United States

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