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A1c Focusing on Both Sides of the Balance Sheet: The Benefit of Liability Optimization
Key Words
Debt Management, Retirement Financial Planning, Behavioral Finance, Financial Decision Making
Short Description
Debt has become a significant issue among US households. Based on our analysis using the 2016 Survey of Consumer Finances, average household interest payments on liabilities exceed expected returns on investment assets by more than 50%. In this study, we first explore the role of US household debt and analyze the impact of different economic, demographic, and behavioral factors on household borrowing decisions. We then separate "good" and "bad" debts depending on type and interest rates, and investigate household characteristics associated with these categories. Lastly, our "alpha-equivalent analysis" reveals substantial potential benefits associated with improving household liability management. For households in the 75th percentile ranked by debt interest rate, reducing rates by five percentiles is equivalent to a return increase of 550 basis points on their investment portfolios. Our results indicate that households with lower asset, income, and education levels could benefit most from assistance with debt optimization.
First & Corresponding Author
Zhikun Liu, Empower®
Authors in the order to be printed
Zhikun Liu, David Blanchett