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The Market for Retirement Financial Advice$
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Olivia S. Mitchell and Kent Smetters

Print publication date: 2013

Print ISBN-13: 9780199683772

Published to Oxford Scholarship Online: January 2014

DOI: 10.1093/acprof:oso/9780199683772.001.0001

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How Important is Asset Allocation to Americans’ Financial Retirement Security?

How Important is Asset Allocation to Americans’ Financial Retirement Security?

Chapter:
(p.89) Chapter 5 How Important is Asset Allocation to Americans’ Financial Retirement Security?
Source:
The Market for Retirement Financial Advice
Author(s):

Alicia H. Munnell

Natalia Orlova

Anthony Webb

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199683772.003.0005

Financial advice tends to focus on financial assets, but other levers may be more important for most households. This chapter proceeds in three stages. First, we report a simple Excel spreadsheet exercise that provides a stylized example of the tradeoff between returns and time spent in the labor force. Next, we use data from the Health and Retirement Study (HRS) on pre-retirees age 51–64 to see how the gap between retirement needs and retirement resources is affected by working longer, taking out a reverse mortgage, controlling spending, and shifting all assets to equities with no risk. Last, we use a simple dynamic programming model to calculate a risk-adjusted measure of the value for the average household of moving from a typical conservative portfolio to an optimal portfolio. Our answer from all three exercises suggests that the focus on asset allocation is misplaced.

Keywords:   asset allocation, controlling spending, optimal allocation, optimal portfolio, replacement rate, retirement, retirement security, reverse mortgage, saving, work longer

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