Summary
• Limited research: Although there has been extensive analysis of the accumulation of retirement assets in the United States, limited research has been done on how quickly Americans use their assets in retirement. Utilizing data from the Health and Retirement Study (HRS), this Issue Brief examines those currently between ages 65 and 75 to determine their levels of wealth in retirement, how those levels have changed, and to see if this group is on track for a financially secure retirement.
• Measuring wealth variables: The HRS measures several key variables, the primary one being total wealth (defined as total assets minus total debt). Others include income, financial wealth, and individual retirement account (IRA) wealth.
• Most new retirees are reasonably maintaining their income and assets: Over the 12-year period from 1992–2004, the majority of 65–75-year-old Americans appear to be starting their retirement reasonably successfully in terms of income and total wealth change. Overall, about 53 percent of Americans who have reached age 65 recently were found to have had no decline in household income, and 71 percent were found to have no decrease in total wealth over the period. About 60 percent had a decline in one or the other, but less than 20 percent had a decline in both.
• But those who are losing money are losing it fast: The prognosis does not look good for those in the study group who have experienced a wealth decline, as they are showing a sharp drop: There was a roughly 50 percent median decline in total wealth from 1992–2004 among those who experienced a decline, and the median average annual decline in total wealth surpassed 5 percent for this group—putting them at significant risk of running out of money in retirement. Those seeing a decline in financial wealth are posting a median decrease at approximately twice the level that research suggests is advisable. Although the HRS dataset does not allow detailed analysis, this is probably due to excessive spending rather than investment loss.
--> The 5 percent solution: Research has shown that, generally, individuals should spend less than 5 percent of their assets in each year of retirement in order to have a high likelihood of not running out of money within 30 years. When individuals’ assets decline faster than this rate, chances go up that they will exhaust their savings sometime in retirement.
• Pension/annuity income a major plus: The HRS shows that individuals with the highest amounts of pension/annuity income tended to fare better than those with little or none of this type of income. However, 60 percent of those in the HRS sample did not have pension income, and future generations of Americans will face a smaller likelihood receiving of pension/annuity income from employment-based arrangements, as private-sector retirement coverage shifts to defined contribution (401(k)-type) plans. The importance of individual decision making increases with these trends. It will be interesting to see if annuities and fixed payment streams begin to be a more popular choice among retirees making choices.
• Education needed in managing money in retirement: The HRS data suggest that that many individuals need to learn much more about managing assets in retirement. How individuals continue to manage their individual account assets—especially IRAs—will be a critical factor, as those who had a decline in IRA wealth had a median decline of the entire amount of the IRA.