How Seniors Change Their Asset Holdings During Retirement?

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This paper examines the changes from 1998 to 2006 in the asset holdings of those who were 60 and older in 2006. It was motivated by a concern that the substitution of defined contribution (DC) for defined benefit (DB) accounts would place overly severe demands on the investment management skills of seniors, and in particular that they might spend their retirement savings too quickly, leaving them penurious as they age. Our results indicate that there is little to be concerned about for the top four quintiles of the income distribution. Households are very cautious about spending down their assets and the vast majority will still have a substantial amount of assets when they pass away. Consequently, there is little reason to discourage the substitution of DC for DB accounts because of a fear of overspending. Our results refer only to typical households and there are undoubtedly many who do spend too much as well as many who spend too little, thus unnecessarily depriving themselves of consumption late in life. There is nothing in our results that diminishes the potential value of more intensive financial education during peoples’ working lives. In the bottom quintile, households do spend non-annuitized assets quickly and subsequently rely heavily on Social Security, DB plans and welfare. This suggests that any Social Security reform that slows the growth of benefits must be sensitive to protecting the poor through devices such as progressive indexing, minimum benefits, or perhaps some enhancement of SSI.