WP#2006-22  

Introduction 

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.

For executive summary in PDF

For full paper in PDF

Wei Sun is a graduate research assistant at the CRR. Robert K. Triest is a visiting scholar at the CRR. Anthony Webb is a research economist at the Center for Retirement Research at Boston College (CRR). The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement Research Consortium. The findings and conclusions are solely those of the authors and do not represent the views of SSA, any agency of the Federal Government or Boston College.