Fitting Home Equity into a Retirement Income Strategy

[Pages:45]Fitting Home Equity into a Retirement Income Strategy

Wade Pfau, Ph.D., CFA

reverse-mortgages

What's Different About Retirement?

? Reduced earnings capacity ? Visible spending constraint ? Heightened investment risk ? Unknown longevity ? Spending shocks ? Compounding inflation ? Declining cognitive abilities

Pre-Retirement vs. Retirement

Key Retirement Risks

Lifetime Sequence of Returns Risk

Challenges for an Individual Pension Plan

? Asset Returns ? Pension Managers ? Pool returns across generations ? Households ? One whack at the cat

Longevity Risk ? Pension Managers ? systemic increases in longevity ? Households ? Idiosyncratic longevity risk

Retirement Goals

Household Balance Sheet

Assets

Liabilities

Human Capital Continuing Career Part-time work

Home Equity

Financial Assets Checking Accounts Brokerage Accounts Retirement Plans

Insurance & Annuities

Social Capital Social Security Medicare Company Pensions

Fixed Expenses Basic Living Needs Taxes Debt Repayment

Discretionary Expenses Travel & Leisure Lifestyle Improvements

Contingencies Long-Term Care Health Care Other Spending Shocks

Legacy Goals Family Community & Society

Family & Community

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