Summary
In addition to accumulating and wisely investing retirement plan assets, individuals reaching retirement age are faced with the question of how to manage these assets so they last throughout retirement. With the first wave of baby boomers hitting retirement just six years from now (in 2011), this question becomes more immediate; until now, there has been much less public debate and even less education on managing wealth in retirement.
The Employee Benefit Research Institute (EBRI), through its Retirement Security Projection Model (RSPM), has been working to quantify whether current workers are on track to accumulate< sufficient assets to maintain a basic standard of living throughout retirement. This model shows that many individuals (particularly married couples) are likely to do so, but it also shows that many others are not (particularly single women).
This Issue Brief provides a first step in determining how retirees now starting to retire—those first to be affected by the shift to lump-sum payments and 401(k) asset accumulation?are managing their wealth. Americans born from 1931–1941 are the focus of this study, since these Americans ranged in age from 51–61 in 1992 (at the beginning of the study period) and had reached age 61–71 by 2002 (the end of the study period). These Americans have been affected by fundamental changes in the employment-based retirement plan market, as fewer people are covered by defined benefit pension plans and more people are covered by defined contribution plans, principally the 401(k) plan. This shift has led to tremendous growth in IRA assets, as workers used these tax-favored savings vehicles to roll over their defined contribution and/or defined benefit assets upon job change or retirement.
It is clear that some new retirees are not on the right track, as about 15 percent of the 64–74-yearold cohort had lost 50 percent or more of their total wealth from 1992–2002, and about 30 percent had lost 50 percent or more of their financial wealth; more than half saw their total wealth grow by 50 percent or more over the period. While health events or the need for health care services clearly increased the chances of losing a significant level of wealth, they were not the only factor or even an overwhelming factor.
One conclusion from the data is that people may benefit from options in their defined contribution plans and IRAs that would allow for more managed withdrawals or annuity payments that produce a more consistent draw-down of wealth in retirement. Another is that retirees will need more help in making these decisions as they increasingly are faced with managing significant wealth in the form of lump-sum distributions from a retirement plan.
Adding to the complexity of these issues is the possible creation of voluntary individual accounts in Social Security, as proposed by President Bush, coupled with a reduction in the annuity benefits from Social Security. Depending on how Social Security recipients are allowed to withdraw dollars from these accounts, retirees could be faced with managing even more lumpsum wealth—and receiving even less lifetime annuity wealth.