Asset Allocation Has ‘Minor’ Role in Retirement Planning

The second piece of analysis moved from hypothetical individuals to examining the effects of alternative strategies on actual households. The exercise consisted of estimating target and projected replacement rates for each household for ages 60 through 70. The metric of interest was the percent of households falling short. The baseline results showed that working longer substantially reduced that metric.

“Three other levers were evaluated against working longer: tapping home equity through a reverse mortgage, controlling spending, and investing 100% in ‘riskless equities.’ The results showed that, for the typical household, asset allocation was unimportant. The importance of asset allocation was somewhat greater for households in the top decile, but less than one would expect.”

The third exercise used something the authors refer to as “dynamic programming techniques” in order to calculate a risk-adjusted measure of the potential gain from portfolio rebalancing for both the typical household and the household in the top 10% of the financial wealth distribution. In all but one case, the dollar amount of the cost or benefit was equal to only a few additional months of work. In other words, asset allocation was not important, the authors concluded.

“Given the relative unimportance of asset allocations,” they wrote, “financial advisors will be of greater help to their clients if they focus on a broad array of tools–including working longer, controlling spending, and taking out a reverse mortgage.”