Retirees Under Consume Their Assets

It is important to understand how current retirees drawdown their retirement assets as we think about how to help new retirees with their financial decision-making. In “The Drawdown of Personal Retirement Assets” NBER Working Paper No. 16675, Professors James M. Poterba, Steven F. Venti, David A. Wise report their study which shows how current retired households are drawing down their retirement assets from personal retirement accounts like 401(k)s and IRAs (PRAs).

“We find a relatively modest rate of withdrawals prior to the age at which households are required to take minimum requisite distributions. Only seven percent of PRA-owning households between the ages of 60 and 69 take annual distributions of more than ten percent of their PRA balance, and only 18 percent PRA households, in this age group, make any withdrawals in a typical year. The rate of distributions rises sharply after age 70 ½, when minimum distributions are required. The proportion of PRA-owning households making a withdrawal jumps to over 60 percent by age 71, and crosses 70 percent a few years later. On average, households aged 60 to 69 with PRA accounts withdraw only about two percent of their account balances each year, considerably less than the rate of return on account balances during our sample period. Even at older ages—after the required minimum distribution age, the percentage of balances withdrawn remains at about five percent.”

In discussions related to retirement income it’s often assumed retirees have to be protected from over consuming assets early in their retirement. My personal experience is retirees remain extremely conservative financially and many sacrifice their current standard of living to preserve long-term assets. I am pleased we now know how retirees actually manage their spending.