Earlier cohorts had defined-benefit plans and therefore less need to tap financial assets
Recent studies have found that past generations drew down their financial assets very slowly in retirement, leaving much of their savings untouched throughout old age.
This finding always seemed obvious to me, given that older cohorts had lifetime income from defined-benefit plans to cover their spending and could keep their financial assets for late-life medical expenses or bequests. The nature of pension coverage, however, has changed dramatically . While most households with heads born between 1920 and 1940 had access to a defined-benefit plan, the youngest baby boomers, born in 1965, have almost no access to such plans. Thus, one would think that looking at the behavior of these early cohorts would tell us little about what boomers will do with their 401 balances.
I am delighted to report that a recent study led by my colleague Gal Wettstein confirms this intuition. This project, using data from the restricted Health and Retirement Study , relates household drawdown behavior to having a defined benefit pension and some control variables.Drawdown of retirement assets is measured as the change in log financial wealth between retirement and a target age . The log of financial wealth ensures that drawdown is measured relative to a household’s overall wealth.
Given the large impact of “having a defined-benefit plan,” using the drawdown speed of older generations for younger generations could significantly underestimate the drawdown speed of baby boomers. The rough estimate from this study is that recent retirees without defined-benefit plans would draw down about a quarter of their wealth by age 70. At this rate, boomers would deplete their assets by 85, even though roughly half would survive past this age.
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