Assets in personal retirement accounts (PRAs) are a large and growing component of household financial wealth, accounting for nearly one-quarter of non- annuity wealth and almost forty percent of wealth excluding annuities and housing in 2010. While much of the past research on these accounts has focused on the accumulation of PRA balances, understanding withdrawal patterns is important for
80 82 84 86 88 90 92 94 96 98 100 cu m ulat iv e p er cen t
Percent of balance withdrawn
Figure 5-2. Distribution of percent of PRA balances withdrawn in a year, all households age
60 to 69 with a PRA account
Note: 82 percent make no withdrawal
20 30 40 50 60 70 80 90 100 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 cu m ulat iv e p er cen t
Percent of balance withdrawn
Figure 5-3. Distribution of percent of PRA balances withdrawn, all households age 72 to 85
with a PRA account
analyzing proposals to encourage full or partial annuitization of PRA balances, as well as for estimating the effects of changes in required minimum distribution (RMD) rules.
We use data from the SIPP and HRS to investigate the actual pattern of withdrawals from PRAs. There are important differences across households, and we are able to identify a number of socio-demographic variables that help predict such differences. Our central finding is that relatively few households draw down their PRA balance completely at the start of retirement, especially when the account is
substantial. Most households appear to conserve their PRA assets. Our findings do not support the concern that households with PRAs will deplete these assets in their first few years of retirement. The low rate of withdrawals from PRAs during our sample period, 1997-2010, combined with investment returns to PRA assets and contributions by some still-employed PRA-owning households, generate an upward-sloping pattern of average PRA balances by age. In our sample, average PRA balances continue to grow through at least age 85, although the rate of growth is slower at older than at younger ages.
The rate of PRA withdrawal rises sharply at age 70½, when RMDs begin, suggesting that many households in their early 70s would not make withdrawals if it were not for the RMD rules. We conclude that changes in the age at which RMDs are required could have substantial effects on withdrawal patterns and on the tax revenue collected from such withdrawals. A one year postponement of the RMD age could reduce the share of PRA balances withdrawn by those in their early 70s by roughly four percentage points.
While average withdrawal rates are low, there is substantial heterogeneity across households, and some withdraw a significant proportion of, or all, PRA assets before the RMD age. Among households headed by someone between the ages of 60 and 69, about 89 (93) percent of PRA owners make an annual withdrawal of less than five (ten) percent of their PRA assets. At ages 72 and older, after RMDs take effect, 59 (76) percent of households withdraw five (ten) percent or less of their PRA balance. Reflecting the heterogeneity in behavior, however, fifteen percent of those over 72 withdraw more than twenty percent of their balance. Among households approaching retirement, whether a withdrawal is made varies greatly with the PRA balance;
households with higher balances are more likely to make a withdrawal. Among those who make a withdrawal, the PRA balance is the most important determinant of the proportion of assets withdrawn. These findings suggest that RMD rules are likely to affect different households differently. Those with large PRA balances are less likely to be constrained to make some distribution, but they may be required to withdraw more than they would otherwise would have.
We note three important limitations of our current analysis. First, we cannot say anything about whether withdrawals from PRAs are transferred, after payment of taxes, to taxable investment accounts, or whether these withdrawals are consumed. While we know that assets in PRAs have not been consumed, it is difficult to infer from PRA balances alone whether a household is building or drawing down wealth. For this reason, we do not try to assess how the draw-down patterns we observe affect late-life financial security. We note that some recent work, notably Shoven and Slavov (2012), has suggested that households might benefit from drawing down their PRA and non- PRA wealth in their sixties so that they can defer claiming Social Security. Integrating the analysis of PRA withdrawals with a broader investigation of household wealth at older ages, along the lines of French, Doctor, and Baker (2007), Hurd (2002), Hurd and Rohwedder (2010), Love, Palumbo and Smith (2008), Poterba, Venti, and Wise
(2011b), and many others, is a key research priority.
We view investigation of whether PRA balances are viewed as a source of precautionary savings as particularly important, because this could affect the analysis of proposals for partial annuitization of PRAs. If households are concerned about late- life expenditure risks, they may choose not to annuitize all or even most of their
financial wealth at retirement. Yaari (1965) famously shows that households that face only longevity risk should fully annuitize, and Davidoff, Brown, and Diamond (2005) show that partial annuitization is attractive in a wider class of environments. In the presence of large uninsured late-life expenses, such as those documented in Marshall, McGarry, and Skinner (2011), however, Inkmann, Lopes, and Michaelides (2011) find that in a calibrated stochastic lifecycle model, annuity demand depends on risks that households are attempting to insure against and the availability of public and private insurance arrangements. Davidoff (2010) suggests that one reason households may
conserve housing equity is to preserve flexibility to fund potentially large health expenses. A similar argument may apply to PRAs.
Second, our analysis excludes individuals who die between waves of the SIPP. Whether death-induced withdrawals should be aggregated with other withdrawals from PRAs depends on the purpose for which one is calculating the withdrawal rate. If the goal is to understand how PRAs are serving the retirement income needs of long-lived households, it seems appropriate to exclude those who die at an early age from the analysis. On the other hand, if the goal is to understand how long assets are held in the PRA system, which might be relevant for some types of tax analysis, then it is more important to recognize that death can be an important factor in generating withdrawals from the retirement saving system. Some withdrawals just before death may be motivated by poor health and associated medical costs - one of the expenditure risks that PRAs may be conserved to insure against.
Finally, the expansion of the PRA system over the last three decades may have shifted the composition of households who save through these accounts. If the first firms to adopt 401(k)s in the 1980s used these plans as supplementary to their defined benefit plans, but if later adopters have used 401(k)s as their primary retirement plans, then the characteristics of households reaching retirement in the last decade with substantial PRA balances may differ from the characteristics of those who will retire with substantial PRA balances in future decades. The type of descriptive analysis that we present in this study is essential for characterizing the changing composition of the PRA-participant population. Analyzing how changing characteristics may affect future PRA withdrawal behavior, and retirement security more generally, is a greater
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Year 50-59 60-69 70-79 80+ all 1997 4,814 3,505 3,326 1,802 13,447 1998 4,615 3,344 3,202 1,195 12,356 1999 4,784 3,308 3,208 1,187 12,487 2001 4,560 3,053 2,579 1,140 11,332 2002 4,575 3,115 2,538 1,063 11,291 2004 6,805 4,615 3,493 2,467 17,380 2005 3,161 2,115 1,623 800 7,699 2009 6,540 5,207 3,203 2,175 17,125 2010 6,144 5,110 3,184 1,433 15,871 all 45,998 33,372 26,356 13,262 118,988 1997 43.8 38.9 24.4 6.8 32.9 1998 45.5 40.6 26.9 10.8 36.3 1999 46.8 40.4 28.8 13.5 37.6 2001 49.3 41.3 30.6 17.3 39.9 2002 50.6 44.7 31.3 19.5 42.0 2004 57.2 50.3 38.8 19.4 46.6 2005 56.6 52.1 36.8 24.0 48.1 2009 55.9 52.1 39.4 29.2 48.5 2010 55.0 53.1 40.7 34.3 50.0 all 51.5 46.3 32.8 19.6 42.7 1997 $34,644 $35,326 $17,885 $3,834 $26,642 1998 $40,942 $39,190 $21,214 $6,866 $32,344 1999 $49,500 $46,854 $27,539 $11,371 $39,944 2001 $52,339 $47,609 $27,080 $13,924 $41,747 2002 $45,304 $51,443 $30,012 $15,170 $40,965 2004 $61,119 $62,790 $43,746 $18,075 $52,125 2005 $64,084 $71,503 $43,936 $22,389 $57,869 2009 $62,573 $68,494 $53,007 $27,280 $58,253 2010 $64,397 $77,090 $60,337 $38,380 $65,502 all $53,382 $56,565 $35,483 $17,656 $46,651 1997 2,034 1,282 752 116 4,184 1998 2,049 1,282 799 120 4,250 1999 2,205 1,259 864 147 4,475 2001 2,203 1,197 743 188 4,331 2002 2,238 1,317 741 201 4,497 2004 3,849 2,242 1,281 473 7,845 2005 1,754 1,035 565 191 3,545 2009 3,617 2,647 1,219 624 8,107 2010 3,296 2,621 1,241 463 7,621 all 23,245 14,882 8,205 2,523 48,855 1997 $79,045 $90,904 $73,323 $55,984 $81,078 1998 $89,917 $96,480 $78,753 $63,613 $89,151 1999 $105,750 $116,097 $95,608 $84,472 $106,165 2001 $106,066 $115,354 $88,640 $80,663 $104,645 2002 $89,550 $115,085 $95,825 $77,707 $97,553 2004 $106,765 $124,717 $112,675 $93,020 $111,972 2005 $113,250 $137,308 $119,432 $93,388 $120,253 2009 $112,001 $131,369 $134,568 $93,271 $120,067 2010 $117,107 $145,254 $148,317 $111,997 $131,111 all $103,683 $122,151 $108,224 $90,133 $109,370
Mean PRA balance (households with a PRA) Age interval Table 1-1. Summary data by age interval and year, from SIPP (in 2010 dollars)
Percent with positive PRA balance
Mean PRA balance Number of Observations
(1) (2) (1) (2) Coef Z-score Coef Z-score Coef Z-score Coef Z-score
spline in age health status - single persons
Age ?63 0.008 12.32 0.014 18.07 VG or excellent if age ?63 0.129 16.89 Age>63 -0.002 -4.26 -0.003 -4.51 VG or excellent if age>63 0.078 10.13
cohort effects Fair or poor if age ?63 -0.213 -22.43 Age 42 in 1997 -0.009 -0.79 -0.030 -2.56 Fair of poor if age>63 -0.179 -20.60 Age 45 in 1997 -0.017 -1.74 -0.063 -5.86 health status - married male
Age 48 in 1997 -0.044 -4.51 -0.100 -9.44 VG or excellent if age ?63 0.019 2.38 Age 51 in 1997 -0.075 -7.78 -0.150 -14.25 VG or excellent if age>63 0.034 3.84 Age 54 in 1997 -0.104 -9.91 -0.181 -15.75 Fair or poor if age ?63 -0.099 -9.84 Age 57 in 1997 -0.152 -13.55 -0.233 -19.08 Fair of poor if age>63 -0.077 -8.35 Age 60 in 1997 -0.184 -15.47 -0.252 -19.63 health status - married female
Age 63 in 1997 -0.232 -18.72 -0.289 -21.56 VG or excellent if age ?63 0.064 8.29 Age 66 in 1997 -0.245 -18.92 -0.273 -19.21 VG or excellent if age>63 0.072 8.37 Age 69 in 1997 -0.266 -19.83 -0.270 -18.63 Fair or poor if age ?63 -0.051 -5.01 Age 72 in 1997 -0.306 -21.44 -0.286 -18.60 Fair of poor if age>63 -0.084 -8.79 Age 75 in 1997 -0.375 -24.43 -0.347 -20.80 Intercept -0.348 -10.58 -0.931 -21.45 Age 78 in 1997 -0.472 -28.37 -0.415 -22.90
Age 81 in 1997 -0.558 -27.76 -0.506 -23.05 number of observations 118,988 118,988 Age 84 in 1997 -0.754 -26.80 -0.668 -21.27 Wald chi2(2) 6,273 16,419
self-reported retirement status Prob > chi2 0.0000 0.0000 retired if age?63 0.042 5.80 Pseudo R2 0.0492 0.2060 retired if age>63 -0.081 -10.01
marital status
Single male if age ?63 -0.060 -8.47 Single male if age>63 -0.013 -1.61 Married if age ?63 0.056 5.64 Married if age>63 0.095 10.16
income
Earned income if age ?63 0.034 22.60 Earned income if age>63 0.023 12.23 Annuity income if age ?63 0.013 5.92 Annuity income if age>63 0.055 30.53
wealth (in 10,000's)
Housing wealth if age ?63 0.004 17.79 Housing wealth if age>63 0.005 27.83 Nonhousing wealth if age ?63 0.001 5.20 Nonhousing wealth if age>63 0.000 2.44
Table 1-2 Estimated probability of having a PRA account, probit marginal effects, households age 50 to 85
(1) (2) (1) (2) Coef z-score Coef z-score Coef z-score Coef z-score
spline in age health status - single persons
Age?69 0.039 21.35 0.037 17.12 VG or excellent if age?69 0.233 7.80 69<age?71 0.015 1.07 0.045 1.27 VG or excellent if 69<age<72 0.167 1.87 Age>71 0.011 2.89 0.012 2.56 VG or excellent if age?72 0.272 4.72
cohort effects Fair or poor if age?69 -0.157 -3.15 Age 42 in 1997 -0.057 -1.47 -0.090 -2.22 Fair or poor if 69<age<72 -0.237 -1.59 Age 45 in 1997 -0.063 -1.78 -0.117 -3.33 Fair or poor if age?72 0.137 1.86 Age 48 in 1997 -0.111 -3.21 -0.205 -5.91 health status - married male
Age 51 in 1997 -0.187 -5.38 -0.325 -9.16 VG or excellent if age?69 0.121 6.18 Age 54 in 1997 -0.241 -6.42 -0.390 -9.85 VG or excellent if 69<age<72 -0.133 -1.65 Age 57 in 1997 -0.292 -7.25 -0.444 -10.39 VG or excellent if age?72 0.034 0.80 Age 60 in 1997 -0.384 -8.98 -0.517 -11.37 Fair or poor if age?69 -0.193 -5.48 Age 63 in 1997 -0.505 -11.04 -0.633 -13.09 Fair or poor if 69<age<72 -0.155 -1.46 Age 66 in 1997 -0.656 -13.51 -0.736 -14.56 Fair or poor if age?72 0.010 0.19 Age 69 in 1997 -0.809 -15.89 -0.832 -15.59 health status - married female
Age 72 in 1997 -0.925 -16.67 -0.944 -15.72 VG or excellent if age?69 0.134 6.81 Age 75 in 1997 -1.066 -16.58 -1.054 -15.05 VG or excellent if 69<age<72 0.154 1.86 Age 78 in 1997 -1.200 -15.86 -1.200 -14.54 VG or excellent if age?72 0.195 4.62 Age 81 in 1997 -1.286 -12.23 -1.323 -11.60 Fair or poor if age?69 -0.042 -1.21 Age 84 in 1997 -1.151 -5.56 -1.098 -4.92 Fair or poor if 69<age<72 -0.182 -1.45
self-reported retirement status Fair or poor if age?72 0.080 1.41 retired if age?69 0.032 1.32
retired if 69<age<72 0.030 0.37 Alpha 1.424 10.29 0.690 8.30 retired if age?72 -0.040 -0.61
marital status number of observations 48,855 48,855 Single male if age?69 0.339 12.74 RMSE 13.513 12.480 Single male if 69<age<72 0.223 2.39
Single male if age?72 0.322 5.98 Married if age?69 0.532 15.67 Married if 69<age<72 0.484 4.74 Married if age?72 0.483 7.80
income sources (in 10,000s)
Earned income if age?69 0.019 18.72 Earned income if 69<age<72 0.008 1.40 Earned income if age?72 0.007 1.60 Annuity income if age?69 0.044 9.58 Annuity income if 69<age<72 0.062 5.86 Annuity income if age?72 0.045 6.56
wealth (in 10,000's)
Housing wealth if age?69 0.009 21.93 Housing wealth if 69<age<72 0.010 8.14 Housing wealth if age?72 0.009 10.58 Nonhousing wealth if age?69 0.000 2.87 Nonhousing wealth if 69<age<72 0.001 5.24 Nonhousing wealth if age?72 0.000 4.25
Variable Variable
Table 2-1 Non-linear least squares estimates of PRA balance for households with a PRA account, households age 50 to 85
(1) (2) (3) (1) (2) (3) Coef Z-score Coef Z-score Coef Z-score Coef Z-score Coef Z-score Coef Z-score
spline in age health status - single persons
Age?69 0.021 12.99 0.019 9.79 0.018 3.07 VG or excellent if age?69 -0.125 -2.50 69<age?71 0.188 30.38 0.179 27.39 0.530 14.05 VG or excellent if 69<age<72 -0.067 -0.68 Age>71 0.004 3.40 -0.001 -0.94 -0.019 -4.14 VG or excellent if age?72 0.015 0.29
cohort effects Fair or poor if age?69 0.185 2.62 Age 51 in 1997 -0.039 -1.84 -0.102 -1.70 Fair or poor if 69<age<72 -0.018 -0.13 Age 54 in 1997 0.000 0.02 -0.010 -0.18 Fair or poor if age?72 -0.043 -0.64 Age 57 in 1997 -0.009 -0.47 -0.026 -0.45 health status - married male
Age 60 in 1997 -0.004 -0.21 -0.065 -1.16 VG or excellent if age?69 0.012 0.33 Age 63 in 1997 0.005 0.25 -0.015 -0.26 VG or excellent if 69<age<72 0.228 2.67 Age 66 in 1997 0.029 1.29 0.054 0.87 VG or excellent if age?72 -0.019 -0.41 Age 69 in 1997 0.037 1.59 0.117 1.80 Fair or poor if age?69 -0.023 -0.43 Age 72 in 1997 0.083 3.44 0.248 3.63 Fair or poor if 69<age<72 0.089 0.80 Age 75 in 1997 0.119 4.44 0.378 4.99 Fair or poor if age?72 -0.110 -2.17 Age 78 in 1997 0.096 3.19 0.355 4.23 health status - married female
Age 81 in 1997 0.131 3.30 0.479 4.36 VG or excellent if age?69 -0.070 -1.86 Age 84 in 1997 0.114 1.63 0.456 2.36 VG or excellent if 69<age<72 0.007 0.08
self-reported retirement status VG or excellent if age?72 0.016 0.35 retired if age?69 0.373 10.22 Fair or poor if age?69 -0.017 -0.31 retired if 69<age<72 0.128 1.48 Fair or poor if 69<age<72 -0.045 -0.37 retired if age?72 0.161 2.53 Fair or poor if age?72 -0.027 -0.49
PRA balance (in 10,000's) Intercept -1.693 -16.18 -1.546 -13.12 -2.177 -6.07 PRA balance if age?69 0.012 13.14
PRA balance if 69<age<72 0.012 4.87 number of observations 25610 25610 25610 PRA balance if age?72 0.013 9.43 Wald chi2(2) 5260.4 5305.9 5604.8
marital status Prob > chi2 0 0 0 Single male if age?69 0.023 0.46 Pseudo R2 0.1871 0.189 0.221 Single male if 69<age<72 0.167 1.58
Single male if age?72 -0.059 -1.11 Married if age?69 -0.034 -0.62 Married if 69<age<72 -0.266 -2.39 Married if age?72 -0.100 -1.77
income sources (in 10,000s)
Earned income if age?69 -0.038 -7.48 Earned income if 69<age<72 -0.058 -4.31 Earned income if age?72 -0.041 -5.41 Annuity income if age?69 0.000 0.05 Annuity income if 69<age<72 -0.002 -0.15 Annuity income if age?72 0.030 3.56
wealth (in 10,000's)
Housing wealth if age?69 -0.003 -3.20 Housing wealth if 69<age<72 0.002 1.27 Housing wealth if age?72 0.001 0.98 Nonhousing wealth if age?69 -0.001 -2.14 Nonhousing wealth if 69<age<72 0.000 -0.26 Nonhousing wealth if age?72 0.000 0.41
Variable Variable
Age
60-69 60-69 72-85 72-85
Not retired
Marital status Single Male. Married Single Male Married
PRA balance mean mean mean mean
Earned income 10th pctile 90th pctile 10th pctile 90th pctile
Annuity income 0 0 0 0
Housing wealth 10th pctile 90th pctile 10th pctile 90th pctile Nonhousing wealth 10th pctile 90th pctile 10th pctile 90th pctile
Health Fair-Poor Ex-VG Fair-Poor Ex-VG