How retirees manage: Wealth after
work
Susan Thorp
University of Technology Sydney
Negotiating the Retirement Risk Zone
December 2013
Financial management
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?
Who are we studying?
 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
Decumulation rates vary by age and time.
Average wealth ($) by age
 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.
65
75
85
 2006-10
65
75
85
2002
 2002-06
2006
2010
 60% households decreased wealth
by average 20% p.a.
 40% households increased wealth
by average 22% p.a.
 At median, wealth fell $1.5K p.a.
Decumulation varies by asset allocation.
Average wealth ($) by asset allocation
>50% in growth
 Large falls for households with more
than 50% of financial wealth in
super/equity
>50% in safe
 Dramatic loss in 2006-10
 Smallest falls for households with
least concentrated portfolios
2010
2002
2006
2010
How fast do retirees spend their nest eggs?
 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
Around 7% of households have less than 3 weeks of the
ASFA ‘modest’ budget in savings.
Low Financial Wealth 2006 (% of sample)
Yes
No
3.1
2.3
5.5
Low Wealth Yes
2002
No
3.3
91.3
94.5
6.4
93.6
Low Financial Wealth 2010 (% of sample)
Yes
No
4.8
1.6
6.4
Low Wealth Yes
2006
No
2.8
90.8
93.6
7.7
92.3
How many retirees use up virtually all their
financial wealth early?




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
What happens to portfolios as people age?
1. Participation
What happens to portfolios as people age?
2. Allocations
Increasing conservatism with age
 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
Which is the biggest risk, health costs or poor
investment returns?
 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%
Payouts from superannuation: 2012
 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
13
Financial management
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.
Policy discussion
 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
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.