Over the past two decades, the aging of the "Baby Boomers" has focused attention on how members of this generation accumulated assets during their working years. Now that the leading edge of this group has passed into retirement, the focus of researchers--as well as policymakers and the financial services industry--is shifting to the drawdown of financial resources in later life. My recent research, much of which is co-authored with James M. Poterba and David A. Wise, focuses on the factors that shape the age profile of wealth after retirement. The goal of this work is to better understand what households do with their assets after retirement and, in particular, to understand how asset drawdown decisions are affected by health, education, and the structure of public and private annuities.
Wealth at Retirement
Retired households depend primarily on three sources of financial support in retirement: benefits from the Social Security system; payments from private defined benefit (DB) pension plans; and withdrawals from household savings, including withdrawals from personal retirement accounts (PRAs) such as IRAs, Keoghs, 401(k)s and similar defined contribution plans. Benefits from Social Security and DB pensions are in the form of annuities that provide a stream of payouts until death. Assets held in PRAs or financial assets held outside of retirement accounts are typically not annuitized and are instead spent or saved at the owners' discretion. In a recent paper, we describe the balance sheets for households headed by someone between the ages of 65 and 69 in the 2008 wave of the Health and Retirement Study (HRS). (1) To facilitate comparison of the various portfolio components, we capitalize Social Security and DB pension payouts. Averaged over all households, the capitalized value of Social Security benefits accounts for about one-third of all household wealth and housing and other real estate account for another one-quarter of wealth. The capitalized value of DB pension benefits, assets held in PRAs, and financial assets held outside PRAs each account for an additional 10 to 15 percent of total wealth.
These averages hide substantial differences in both the level of total wealth and its composition. …