Although the shift from defined benefit pension plans to defined contribution plans raises concerns that some retirees may outlive their assets, most spend their wealth cautiously. High income retirees continue to accumulate wealth until age 85. Net worth for middle-income retirees begins declining after age 70, but only very slowly. Low-income retirees never accumulate much wealth and spend their limited assets quickly, however, leaving most dependent on Social Security.
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The gradual substitution of defined contribution (DC)
retirement plans for defined benefit (DB) plans is forcing
all who save for retirement to become investment
managers. Once people retire, they have the added
challenge of preserving sufficient assets to support
themselves if they live longer than expected. Annuities
can provide protection, but very few savers convert
assets into annuities. They are advantageous to healthy
individuals who will live a long time but overpriced for
the average person.
It would be worrisome if the lack of annuitization
led retirees to overspend and become destitute if they
live longer than expected. But recent research suggests
that most retirees are extremely cautious when formulating
their spending plans. Love, Palumbo, and Smith
(2008) find that annualized wealth increases with age
and Hurd and Rohwedder (2008) estimate that 87 percent
of surviving spouses end up with some wealth
when they die.
Retirees' conservatism can be explained in different
ways. They may have a very strong bequest motive. Or
they may be particularly cautious about future risks,
especially those related to health costs. Or many may
unnecessarily deprive themselves of consumption in
their golden years.
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