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How Quickly Do Older Adults Spend Their Wealth?

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Document date: April 19, 2010
Released online: April 22, 2010

Abstract

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.


The text below is an excerpt from the complete document. Read the full brief in PDF format.

Introduction

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.

(End of excerpt. The full brief is available in PDF format.)



Topics/Tags: | Economy/Taxes | Retirement and Older Americans


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