How retirees manage: Wealth after work

Susan ThorpUniversity of Technology Sydney

Negotiating the Retirement Risk Zone December 2013

1. How fast do retirees spend their nest eggs?

2. How many retirees use up virtually all their financial wealth early?

3. What happens to portfolio allocations as retirees age?

4. Which is the biggest risk: health costs or poor investment returns?

Financial management

Retired households from HILDA – annual survey of 7,000 households 2002, 2006 and 2010 survey wealth Follows around 900 households

Nine asset classes: liquid assets; cash investments; superannuation; equity in principal residence; business; real estate; vehicles; ‘other’

Gross assets = Sum of all nine asset classes

Wealth = gross assets less debt less equity in family home

Who are we studying?

2002-06 55% households decreased

wealth by average 20% p.a. 45% households increased

wealth by average 19% p.a. At median, wealth fell $4K p.a.

2006-10 60% households decreased

wealth by average 20% p.a. 40% households increased

wealth by average 22% p.a. At median, wealth fell $1.5K p.a.

Decumulation rates vary by age and time.

Average wealth ($) by age

65

65

75

75

85

852002

2006

2010

Large falls for households with more than 50% of financial wealth in super/equity

Dramatic loss in 2006-10

Smallest falls for households with least concentrated portfolios

Decumulation varies by asset allocation.

2010 201

02006200

2

Average wealth ($) by asset allocation

>50% in growth

>50% in safe

Wealth ex-residence falls by around 2-3% p.a. until older ages, then slows

Averages decreases mask huge variation between households and over time

Retirement income products with market risk should offer flexibility in minimum withdrawal rates.

Allow for precautionary savings

How fast do retirees spend their nest eggs?

Around 7% of households have less than 3 weeks of the ASFA ‘modest’ budget in savings.

 Low Financial Wealth 2006 (% of

sample)

Low Wealth 2002

  Yes No  Yes 3.1 2.3 5.5No 3.3 91.3 94.5  6.4 93.6  

         

 Low Financial Wealth 2010 (% of

sample)

Low Wealth 2006

  Yes No  Yes 4.8 1.6 6.4No 2.8 90.8 93.6  7.7 92.3  

Around 7% have less than 3 weeks ASFA modest budget Around 10% have less than 12 weeks Around 18% have less than 24 weeks Around 28% have less than 48 weeks

Rates of wealth exhaustion increase between 2006-10

Couples, home owners, precautionary savers, healthy are less likely to run out

Having very low financial wealth DOES NOT induce people to sell their houses

How many retirees use up virtually all their financial wealth early?

What happens to portfolios as people age?

1. Participation

What happens to portfolios as people age?

2. Allocations

Lower participation in all asset classes with age (apart from cash)

Share of superannuation falls by 0.4 percentage points with each year of age

Share of principal residence rises by 6.4 percentage points with each year of age

Home ownership peaks around age 74

Share of cash rises by 0.6 percentage points with each year of age

Increasing conservatism with age

Households spend cash when IN bad health

Households that EXPECT bad health save cash

Few health impacts in this sample – excludes people living in nursing homes

Average share of expenditure on health is around 3%

Which is the biggest risk, health costs or poor investment returns?

13

Lump sum: (50% retirement payouts)─ invest outside the superannuation system

Income stream: (50% retirement payouts)─ Account-based pension: Around 98% of income streams, by

assets─ Annuity: Around 2% term annuity, small sales of new life

annuities ─ Hybrid longevity products: minimum payment guarantee ** Reverse mortgage: around 42,000 current loans, mainly lump sums

Payouts from superannuation: 2012

How fast do retirees spend their nest eggs? Average retired Australian household gained in 2002-06 and lost in 2006-10, in line with financial market trends (and more diversified households did better).

How many retirees use up virtually all their financial wealth early? Around 7% of retired households have less than 3 weeks of the modest ASFA budget in financial wealth. Low wealth numbers got worse over time.

Financial management

What happens to portfolios as retirees age?Older households prefer less risk and more liquidity, while holding on to the family home.

Which is the biggest risk, health costs or poor investment returns?The effect of health shocks is minimal. Investment returns have dramatic effects.

Financial management

Minimum income draws from allocated pensions can be a binding constraint

Older people spend slower; housing wealth is preserved

Inflexibility when combined with financial shocks is problematic in retirement income products

Need for guarantees and/or drawdown flexibility

Policy discussion

Acknowledgements:

Alexandra Spicer, UTS Olena Stavrunova, UTS

This research uses unit record data from the Household, Income and Labour Dynamics in Australia (HILDA) survey. The HILDA Project was initiated and is funded by the Australian Government Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA) and is managed by the Melbourne Institute of Applied Economic and Social Research (MIAESR). The findings and views reported in this article, however, are those of the author and should not be attributed to either FaHCSIA or MIAESR. Thorp acknowledges support from ARC DP120102239. The Chair of Finance and Superannuation, UTS, (Thorp) receives support from the Sydney Financial Forum (through Colonial First State Global Asset Management), the NSW Government, the Association of Superannuation Funds of Australia (ASFA), the Industry Superannuation Network (ISN), and the Paul Woolley Centre for the Study of Capital Market Dysfunctionality, UTS.