Households nearing retirement have more effective levers available, including delaying retirement, taking a reverse mortgage and controlling spending, according to the Center for Retirement Research at Boston College (CRR). Each one – and particularly working longer – is a more potent alternative to asset allocation for most households, its analysis shows.
In its comparison, the CRR found at a retirement age of 62, 74% of households fall short of their target replacement rate, but delaying retirement to age 67 reduces this figure to 47%. In addition, at age 62, the percent of households falling short drops by 7 percentage points if households take a reverse mortgage and by 3 percentage points if households follow the control spending strategy.
In contrast, investing assets in “riskless equities” shaves off only 1 percentage point. Results at age 67 show a larger effect for each of these strategies, but the pattern is identical. Asset allocation remains the least effective option, even assuming that equities are riskless.
The CRR says it is not surprising that asset allocation is less effective than the alternatives given that most households have only modest financial assets. Therefore, it narrowed the analysis to the top decile of the wealth distribution, which includes households with more than $500,000 in financial wealth. Because these households are wealthier, a lower share fall short at age 62 even in the base case – just 39%.
However, if top-decile households worked to 67, the share falling short drops to 17%. The alternative levers of a reverse mortgage, controlling spending and riskless asset allocation, have roughly equivalent effects on wealthy households. So even for the high-wealth group, asset allocation is no better than the other levers. The full CRR brief can be downloaded from here.