Portfolio Choice in Retirement: What is the Optimal Home Equity Release Product?

41 Pages Posted: 26 Mar 2014

See all articles by Katja Hanewald

Katja Hanewald

UNSW Sydney - School of Risk & Actuarial Studies and ARC Centre of Excellence in Population Ageing Research (CEPAR)

Thomas Post

Maastricht University - School of Business and Economics - Department of Finance; Netspar

Michael Sherris

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies; UNSW Business School

Multiple version iconThere are 3 versions of this paper

Date Written: March 11, 2014

Abstract

We study the decision problem of the optimal choice between home equity release products from a retired homeowner’s perspective in the presence of longevity, long-term care, house price, and interest rate risk. The individual can choose to release home equity using reverse mortgages or home reversion plans, to buy annuities, and long-term care insurance. The individual enjoys utility gains from having access to either one of the two equity release products. Higher utility gains are found for the reverse mortgage, as its product features allow for higher lump-sum payouts and provide downside protection for house prices. When given a timing choice, the individual chooses to unlock home equity early in retirement. The availability of a government-provided LTCI does not significantly change the optimal choice of equity release products.

Keywords: Retirement, home equity release, reverse mortgage, home reversion plan

JEL Classification: D14, D91, G11, R20

Suggested Citation

Hanewald, Katja and Post, Thomas and Sherris, Michael, Portfolio Choice in Retirement: What is the Optimal Home Equity Release Product? (March 11, 2014). Netspar Discussion Paper No. 03/2014-007, Available at SSRN: https://ssrn.com/abstract=2414505 or http://dx.doi.org/10.2139/ssrn.2414505

Katja Hanewald

UNSW Sydney - School of Risk & Actuarial Studies and ARC Centre of Excellence in Population Ageing Research (CEPAR) ( email )

School of Risk & Actuarial Studies
UNSW Sydney
Sydney, New South Wales NSW 2052
Australia

Thomas Post (Contact Author)

Maastricht University - School of Business and Economics - Department of Finance ( email )

Tongersestraat 53
Maastricht, 6200 MD
Netherlands
+31 43 38 83899 (Phone)
+31 43 38 84875 (Fax)

HOME PAGE: http://www.thomas-post.com

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://www.netspar.nl

Michael Sherris

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies ( email )

UNSW Business School
Risk and Actuarial Studies
Sydney, NSW 2052
Australia
+61 2 9385 2333 (Phone)
+61 2 9385 1883 (Fax)

HOME PAGE: http://www.asb.unsw.edu.au/schools/Pages/MichaelSherris.aspx

UNSW Business School ( email )

Sydney, NSW 2052
Australia

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