Wealth after retirement.

• Author: Venti, Steven

Over the past two decades, the aging of the "Baby Boomers" has focused attention on how members of this generation accumulated assets during their working years. Now that the leading edge of this group has passed into retirement, the focus of researchers--as well as policymakers and the financial services industry--is shifting to the drawdown of financial resources in later life. My recent research, much of which is co-authored with James M. Poterba and David A. Wise, focuses on the factors that shape the age profile of wealth after retirement. The goal of this work is to better understand what households do with their assets after retirement and, in particular, to understand how asset drawdown decisions are affected by health, education, and the structure of public and private annuities.

Wealth at Retirement

Retired households depend primarily on three sources of financial support in retirement: benefits from the Social Security system; payments from private defined benefit (DB) pension plans; and withdrawals from household savings, including withdrawals from personal retirement accounts (PRAs) such as IRAs, Keoghs, 401(k)s and similar defined contribution plans. Benefits from Social Security and DB pensions are in the form of annuities that provide a stream of payouts until death. Assets held in PRAs or financial assets held outside of retirement accounts are typically not annuitized and are instead spent or saved at the owners' discretion. In a recent paper, we describe the balance sheets for households headed by someone between the ages of 65 and 69 in the 2008 wave of the Health and Retirement Study (HRS). (1) To facilitate comparison of the various portfolio components, we capitalize Social Security and DB pension payouts. Averaged over all households, the capitalized value of Social Security benefits accounts for about one-third of all household wealth and housing and other real estate account for another one-quarter of wealth. The capitalized value of DB pension benefits, assets held in PRAs, and financial assets held outside PRAs each account for an additional 10 to 15 percent of total wealth.

These averages hide substantial differences in both the level of total wealth and its composition. At the 90th percentile of the wealth distribution, financial assets (including PRAs) and DB pension wealth account for over half of all balance sheet wealth and Social Security is relatively unimportant. At the other extreme, in the lower part of the wealth distribution, many households have few assets outside of Social Security and housing. Half of all households headed by someone between 65 and 69 had total financial assets, including 401(k)s and IRAs, of less than $52,000 in 2008. Thus, a large fraction of households have few assets, with the possible exception of housing equity, to supplement annuity income--primarily Social Security--in retirement. For example, only 47 percent of these households have sufficient financial assets to purchase a private annuity that would increase their life-contingent income by more than $5,000 per year. (2) Thus it is...