Annuitized Wealth at Older Ages

This research was funded by the Employee Benefits Security Administration of the U.S. Department of Labor (contract J-9-P-2-0034).

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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How older adults dispose of their retirement assets has important consequences for economic well-being in later life. Retirees can choose to receive their retirement benefits as annuities, which provide continuous streams of payments until death and thus protect them against the risk of depleting all of their wealth before they die. Or they can choose to receive their benefits as lump sums, which could raise consumption for those who do not survive until advanced ages and allow them to bequeath any remaining assets to their heirs. Most Americans who retired over the past half century did not have to decide how to dispose of their retirement assets because they held most of their wealth in the form of annuities paid by Social Security and traditional employer-sponsored defined benefit (DB) plans. Today, however, with the growth of Individual Retirement Accounts (IRAs) and the shift of retirement assets from DB pension plans to defined contribution (DC) plans, more and more older adults are entering retirement with large stocks of accumulated funds.

Little is known about how retirees dispose of their DC and IRA retirement assets. Although a few studies have examined annuitization decisions by retirees, data problems limit their conclusions. Some studies, for example, computed annuitization rates only for retirees in particular pension plans, and these findings may not generalize to the broader population of older adults. Another study described how workers dispose of their DC plan assets when they leave their employers, but the sample did not include adults older than 63. One study examined the intentions of individuals to annuitize their DC assets, but it is not known whether retirees carried out their plans.

This paper describes the importance of DC and IRA assets to retirement security for older adults and examines how they dispose of these assets when they retire. The analysis uses nationally representative data from the 1992–2002 waves of the Health and Retirement Study (HRS). After providing some background and describing the data and methods, the paper reports the share of older adults with DC plan and IRA assets, the value of these assets, and how they vary by key characteristics. We then describe how older adults dispose of their DC and IRA assets when they separate from their employers, devoting special attention to those who convert their assets into annuities. The paper also measures the share of elderly adults receiving annuity payments and the share of total wealth they hold in the form of annuities.

Note: This report is available in its entirety in the Portable Document Format (PDF).

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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