Optimal Retirement Asset Decumulation Strategies: The Impact of Housing Wealth

38 Pages Posted: 20 May 2007

See all articles by Wei Sun

Wei Sun

Renmin University of China - Hanqing Advanced Institute of Economics and Finance and School of Finance

Robert K. Triest

Federal Reserve Bank of Boston - Research Department; Boston College

Anthony Webb

Boston College - Center for Retirement Research

Date Written: January 20, 2007

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 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: D14, D91, G11, J14

Suggested Citation

Sun, Wei and Triest, Robert and Webb, Anthony, Optimal Retirement Asset Decumulation Strategies: The Impact of Housing Wealth (January 20, 2007). FRB of Boston Public Policy Discussion Paper No. 07-2. Available at SSRN: https://ssrn.com/abstract=987303 or http://dx.doi.org/10.2139/ssrn.987303

Wei Sun

Renmin University of China - Hanqing Advanced Institute of Economics and Finance and School of Finance ( email )

59 Zhongguancun Street
Beijing, Beijing 100872
China

Robert Triest (Contact Author)

Federal Reserve Bank of Boston - Research Department ( email )

600 Atlantic Avenue
Boston, MA 02210
United States
617-973-3431 (Phone)
617-973-3957 (Fax)

Boston College ( email )

Chestnut Hill, MA 02167
United States

Anthony Webb

Boston College - Center for Retirement Research ( email )

Fulton Hall 550
Chestnut Hill, MA 02467
United States

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