How Important is Asset Allocation to Financial Security in Retirement?

Abstract

is a research economist. The opinions and conclusions expressed are solely those of the authors and do not represent the views of Boston College.

Are Retirees Falling Short? Reconciling the Conflicting Evidence

“…Source: Authors' calculations. Percent of All Households Falling Short of Target by Age at Retirement, Base Case and with a Reverse Mortgage Source:Munnell, Orlova, and Webb (2013). Percentage of Households Age 51-61 AtRisk, 2004 Note: NRRI = National Retirement Risk Index.…”

“…The denominator in the NRRI replacement rate target includes imputed rent and investment returns minus interest paid and is averaged over the household's working life. The denominator in the HRS study is labor market earnings averaged over the previous 10 years.8 Social Security benefits are calculated from actual or imputed earnings records when self-reported data are missing.9 For more details on the methodology, seeMunnell, Orlova, and Webb (2013). 10 This exercise assumes a nominal annuity, whereas the NRRI assumes the purchase of an inflation-indexed annuity.…”

Do Households Increase Their Savings When the Kids Leave Home?

“…Academic opinion differs as to whether the United States faces a retirement savings crisis. Some researchers argue that only half of households will be able to maintain their customary spending level in retirement (Mitchell andMoore 1998, Munnell, Orlova, andWebb 2013). Others argue that maintaining consumption is an overly ambitious and indeed suboptimal goal.…”

Are Retirees Falling Short? Reconciling the Conflicting Evidence

“…In the same vein, the National Retirement Risk Index shows that half of today's working households will not be able to maintain their pre-retirement living standards (Munnell, Webb, and Golub-Sass 2012). Another recent study using the Health and Retirement Study (HRS) and similar assumptions also concludes that about half of pre-retirees are not on track to maintain their pre-retirement consumption (Munnell, Orlova, and Webb 2013). By contrast, Scholz, Seshadri, and Khitatrakun (2006), using the HRS and a life-cycle model of optimal wealth accumulation and decumulation, conclude that the majority of pre-retirees have an optimal level of wealth.…”

“…Results from the HRS. A second analysis was designed to compare the effectiveness of asset allocation to other levers -controlling spending, working longer and tapping home equity -in improving retirement security (Munnell, Orlova, and Webb, 2013). That study used data on working households aged 51-64 from the HRS, a nationally representative panel survey of older households conducted every two years since 1992.…”