How Seniors Change their Asset
Holdings During Retirement
Karen Smith, Mauricio Soto, and Rudolph G. Penner
The Urban Institute [http://www.retirementpolicy.org]
11th Annual Joint Conference of the Retirement
Research Consortium, August 10, 2009
The wealth of the typical older
household was about $715,000 in 2006
Mean of Middle Quintile of Income, Households 60 and Older
Net
worth,
378,000,
53%
Social
Security,
212,500 ,
30%
Defined
benefit,
125,000 ,
17%
Source: Authors’ calculations using the Health and Retirement Study (1998-2006).
2
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 ageprofiles of assets deaccumulation?

A dollar in retirement accounts and a dollar
outside these accounts—which is spent first?
3
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?)
4
Our immediate concern is net worth
Mean of Middle Quintile of Income
Net
worth,
378,000,
53%
Social Security
and defined
benefit wealth,
337,283 , 47%
Source: Authors’ calculations using the Health and Retirement Study (1998-2006).
5
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)
6
Net worth= net housing + retirement
accounts + other assets
Mean of Middle Quintile of Income, 2006
Retirement
accounts
66,315 ,
18%
Other
assets,
149,900 ,
40%
Fixed income, 14%
Stocks, 10%
Other property, 11%
Business equity, 5%
Net
housing,
161,768 ,
42%
Source: Authors’ calculations using the Health and Retirement Study (1998-2006).
7
1998-2006: boom in housing; turbulence
in the stock market
S&P Case-Shiller and S&P 500 Indices, 1998-Q1=100
Housing
Stocks
200
180
160
140
120
100
80
60
40
20
0
173
155
121
130
114
86
97
115
66
55
<-2006
1998
2000
2002
2004
2006
2008
Year
8
Source: Authors’ calculations using Standard and Poor’s (1998-2006).
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
Retirement accounts + other assets
Net housing
$500,000
$400,000
$300,000
$200,000
$100,000
161K
101K
$0
1998
2000
2002
2004
2006
Source: Authors’ calculations using the Health and Retirement Study (1998-2006).
9
Fixed-effects regressions—factors that
explain the variation of net worth
Percent change of net worth (log regression)
Significant at 90%
Social Security (1%)
Pensions (1%)
Earnings (1%)
Poor health
Single
Omitted: Year 1998
Year 2000
Year 2002
Year 2004
Year 2006
Omitted: Age 50-54
Age 55-59
Age 60-64
Age 65-69
Age 70-74
Age 75-79
Age 80-84
Age 85+
-10%
Income
Changing
characteristics
Stock market
and housing
Age profile
-5%
0%
5%
10%
15%
20%
Source: Authors’ calculations using the Health and Retirement Study (1998-2006).
25%
10
1. Housing and other assets decumulate
at very old age
Age-Dummies Coefficients of Other Assets and Net Housing Regressions
Other assets
Net housing
12%
8%
4%
0%
Age
50-54
Age
55-59
Age
60-64
Age
65-69
Age
70-74
Age
75-79
Age
80-84
Age
85+
11
Source: Authors’ calculations using the Health and Retirement Study (1998-2006).
2. Households accumulate in retirement
accounts until their mid-60s
Age-Dummies Coefficients of Retirement Account Regression
50%
Retirement accounts
40%
30%
20%
10%
0%
Age Age Age Age Age Age Age
50-54 55-59 60-64 65-69 70-74 75-79 80-84
Age
85+
12
Source: Authors’ calculations using the Health and Retirement Study (1998-2006).
3. Net worth accumulation patterns
vary by income group
Age-Dummies Coefficients of Net Worth Regression
100%
High Income
Middle Income
Low Income
75%
50%
25%
0%
-25%
Age Age Age Age Age Age Age
50-54 55-59 60-64 65-69 70-74 75-79 80-84
Age
85+
13
Source: Authors’ calculations using the Health and Retirement Study (1998-2006).
4. Retirement accounts of high-income
households peak at later ages
Age-Dummies Coefficients for Retirement Account Regression
100%
High Income
Middle Income
Low Income
75%
50%
25%
0%
Age
50-54
Age
Age
Age
55-59 60-64 65-69
Age
Age
Age
70-74 75-79 80-84
Age
85+
-25%
14
Source: Authors’ calculations using the Health and Retirement Study (1998-2006).
5. Households accumulate in retirement
accounts and decumulate other assets
Age-Dummies Coefficients for Retirement Accounts and Other Assets Regressions
150.0%
Retirement accounts
Other assets
100.0%
50.0%
0.0%
Age Age Age Age Age Age Age Age
50-54 55-59 60-64 65-69 70-74 75-79 80-84 85+
-50.0%
Source: Authors’ calculations using the Health and Retirement Study (1998-2006).
15
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
16