EBRI Issue Brief

In Data There is Truth: Understanding How Households Actually Support Spending in Retirement

Jun 25, 2021 27  pages


This Issue Brief uses a unique database to gain insight into some of the most important policy questions involving retirees today:

  • How do households generate income in retirement to support their spending and what role do individual retirement account (IRA) distributions play in this process?
  • Are required minimum distributions (RMDs) from IRAs taken as a signal for appropriate withdrawal behavior? If not, do those who take out more than the minimum or start before age 70-½ need the distributions to support their spending behavior?
  • Are some households continuing a smaller percentage of preretirement spending than would be indicated from industry averages? If so, how many of them would be able to increase their IRA distributions in a "safe" manner?
  • What happens to 401(k) and IRA money at retirement? How rapidly does money leave 401(k) funds at retirement, and if money is rolled over from a 401(k) to an IRA, what happens to the asset allocation? Does the relative equity concentration in a post-rollover IRA depend on whether the household has guaranteed retirement income other than Social Security (e.g., annuities and/or pensions)?

Past research has offered tentative answers to some of these questions. However, it has typically had a narrow and in-depth focus on individual components, looking strictly at either defined contribution (DC) plan participant savings and balances or household spending behavior. The analysis almost invariably relies on survey data.

We are taking a groundbreaking approach, drawing on data tracking both actual income and spending and 401(k) and IRA data to offer a holistic view of how a retired household supports their spending in retirement.[i]

This paper is based on research from a collaboration between the Employee Benefit Research Institute (EBRI), with more than four decades of research on retirement policy, and J.P. Morgan Chase & Co., which serves nearly half of U.S. households. As of 2018, EBRI data on more than 23 million 401(k) accounts and IRAs details such variables as account balances, asset allocation, and post-retirement withdrawals. J.P. Morgan Chase data include a comprehensive view of total household spending through all payment mechanisms (credit card, debit card, cash, and checking) and sources of income including Social Security, annuity, pensions, etc. for around 21 million customer households.[ii]

Among the highlights of our research findings:

  • On average, those households taking an IRA withdrawal prior to reaching the age for required minimum distributions appear to need the additional income to support their current consumption levels. However, that may not be the case for households taking more than the required minimum distribution after age 70-½.
  • While a significant percentage of households in our sample with "spending gaps" could increase post-retirement expenditures, it is not as large as conventional wisdom might lead one to believe.
  • Across retirement wealth quartiles, there is more spending at almost all ages for households who have at least some annuities and/or pensions.
  • We find a very significant overall decrease in asset allocation equity concentration after rollover from a 401(k) to an IRA at retirement age.
  • We also found that when it comes to the most conservative 401(k) investors, those without annuities and/or pensions had a slightly larger equity concentration in their IRA portfolios after rollover than they had in their 401(k) plans; however, those with some annuities and/or pensions had a significantly larger increase in equity concentration.

In future research, we will continue to harness the data to gain a deeper understanding of how households behave in saving for and spending in retirement and what factors drive those behaviors.