How Seniors Change their Asset Holdings During Retirement

Karen Smith, Mauricio Soto, and Rudolph G. PennerThe Urban Institute [http://www.retirementpolicy.org]

11th Annual Joint Conference of the Retirement Research Consortium, August 10, 2009

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The wealth of the typical older household was about $715,000 in 2006

Mean of Middle Quintile of Income, Households 60 and Older

Source: Authors’ calculations using the Health and Retirement Study (1998-2006).

Social Security, 212,500 ,

30%

Net worth, 378,000, 53%

Defined benefit,

125,000 , 17%

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What happens to this wealth in retirement? How do older adults accumulate assets before

retirement? How do they decumulate this wealth in retirement?

What are the main factors explaining the age- profiles of assets deaccumulation?

A dollar in retirement accounts and a dollar outside these accounts—which is spent first?

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Spend-down decisions will be more important for future retirees

Replacement rate from Social Security

Wealth from defined benefit pensions

401(k) balances (we hope)

Years in retirement (we hope?)

5

Our immediate concern is net worth

Mean of Middle Quintile of Income

Source: Authors’ calculations using the Health and Retirement Study (1998-2006).

Net worth, 378,000, 53% Social Security

and defined benefit wealth, 337,283 , 47%

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How well will older households manage their net worth?

Individuals are poor financial managers during the accumulation phase (Choi, Laibson, and Madrian 2005; Olsen 2007; Nesbitt 1995)

But households are cautious in their spending plans in retirement

(Hurd and Rohwedder 2008; Anderson et al. 2004; Love, Polumbo, and Smith 2008; Smith and Toder 1999)

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Net worth= net housing + retirement accounts + other assets

Mean of Middle Quintile of Income, 2006

Source: Authors’ calculations using the Health and Retirement Study (1998-2006).

Net housing, 161,768 ,

42%

Retirement accounts 66,315 ,

18%

Other assets,

149,900 , 40%

Fixed income, 14%

Stocks, 10%

Other property, 11%Business equity, 5%

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1998-2006: boom in housing; turbulence in the stock market

S&P Case-Shiller and S&P 500 Indices, 1998-Q1=100

Source: Authors’ calculations using Standard and Poor’s (1998-2006).

155130

114

173

11586

66

121

97

55

020406080

100120140160180200

1998 2000 2002 2004 2006 2008

Year

HousingStocks

<-2006

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More than 90 percent of the increase in net worth was due to the housing boom

Net Worth for Middle Quintile of Income, 1998-2006

Source: Authors’ calculations using the Health and Retirement Study (1998-2006).

161K

101K

$0

$100,000

$200,000

$300,000

$400,000

$500,000

1998 2000 2002 2004 2006

Retirement accounts + other assetsNet housing

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Fixed-effects regressions—factors that explain the variation of net worth

Source: Authors’ calculations using the Health and Retirement Study (1998-2006).

Percent change of net worth (log regression)

Year 2000Year 2002Year 2004Year 2006Omitted: Age 50-54Age 55-59Age 60-64Age 65-69Age 70-74Age 75-79Age 80-84Age 85+Constant

-10% -5% 0% 5% 10% 15% 20% 25%

Social Security (1%)Pensions (1%)Earnings (1%)

Poor healthSingle

Omitted: Year 1998Year 2000Year 2002Year 2004Year 2006

Omitted: Age 50-54Age 55-59Age 60-64Age 65-69Age 70-74Age 75-79Age 80-84

Age 85+

Significant at 90%

Income

Changing characteristics

Stock market and housing

Age profile

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1. Housing and other assets decumulate at very old age

Source: Authors’ calculations using the Health and Retirement Study (1998-2006).

Age-Dummies Coefficients of Other Assets and Net Housing Regressions

0%

4%

8%

12%

Age50-54

Age55-59

Age60-64

Age65-69

Age70-74

Age75-79

Age80-84

Age85+

Other assetsNet housing

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2. Households accumulate in retirement accounts until their mid-60s

Source: Authors’ calculations using the Health and Retirement Study (1998-2006).

Age-Dummies Coefficients of Retirement Account Regression

0%

10%

20%

30%

40%

50%

Age50-54

Age55-59

Age60-64

Age65-69

Age70-74

Age75-79

Age80-84

Age85+

Retirement accounts

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3. Net worth accumulation patterns vary by income group

Source: Authors’ calculations using the Health and Retirement Study (1998-2006).

Age-Dummies Coefficients of Net Worth Regression

-25%

0%

25%

50%

75%

100%

Age50-54

Age55-59

Age60-64

Age65-69

Age70-74

Age75-79

Age80-84

Age85+

High IncomeMiddle IncomeLow Income

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4. Retirement accounts of high-income households peak at later ages

Source: Authors’ calculations using the Health and Retirement Study (1998-2006).

Age-Dummies Coefficients for Retirement Account Regression

-25%

0%

25%

50%

75%

100%

Age50-54

Age55-59

Age60-64

Age65-69

Age70-74

Age75-79

Age80-84

Age85+

High IncomeMiddle IncomeLow Income

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5. Households accumulate in retirement accounts and decumulate other assets

Source: Authors’ calculations using the Health and Retirement Study (1998-2006).

-50.0%

0.0%

50.0%

100.0%

150.0%

Age50-54

Age55-59

Age60-64

Age65-69

Age70-74

Age75-79

Age80-84

Age85+

Retirement accountsOther assets

Age-Dummies Coefficients for Retirement Accounts and Other Assets Regressions

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Summary Households’ balance sheets were healthy in 2006

Boom provided households with a financial cushion for the turbulence experienced after 2007

Net worth increases until the mid-60s and then declines

High-income households do not decumulate

In their 50s and 60s, many households accumulate assets in their retirement accounts and decumulate other assets