How Seniors Change their Asset Holdings During Retirement Karen Smith, Mauricio Soto, and Rudolph G. Penner The Urban Institute [ 11th Annual Joint Conference of the Retirement Research Consortium, August 10, 2009

2 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 ( ).

3 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?

4 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 ( ).

6 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)

7 Net worth= net housing + retirement accounts + other assets Mean of Middle Quintile of Income, 2006 Source: Authors’ calculations using the Health and Retirement Study ( ). Fixed income, 14% Stocks, 10% Other property, 11% Business equity, 5%

: 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 ( ).

9 More than 90 percent of the increase in net worth was due to the housing boom Net Worth for Middle Quintile of Income, Source: Authors’ calculations using the Health and Retirement Study ( ).

10 Fixed-effects regressions—factors that explain the variation of net worth Source: Authors’ calculations using the Health and Retirement Study ( ). Percent change of net worth (log regression)

11 1. Housing and other assets decumulate at very old age Source: Authors’ calculations using the Health and Retirement Study ( ). Age-Dummies Coefficients of Other Assets and Net Housing Regressions

12 2. Households accumulate in retirement accounts until their mid-60s Source: Authors’ calculations using the Health and Retirement Study ( ). Age-Dummies Coefficients of Retirement Account Regression

13 3. Net worth accumulation patterns vary by income group Source: Authors’ calculations using the Health and Retirement Study ( ). Age-Dummies Coefficients of Net Worth Regression

14 4. Retirement accounts of high-income households peak at later ages Source: Authors’ calculations using the Health and Retirement Study ( ). Age-Dummies Coefficients for Retirement Account Regression

15 5. Households accumulate in retirement accounts and decumulate other assets Source: Authors’ calculations using the Health and Retirement Study ( ). Age-Dummies Coefficients for Retirement Accounts and Other Assets Regressions

16 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