What makes MIT economist James Poterba’s research so valuable is that his work focuses as much on public policy as on the private-sector financial behavior that is the more typical field of observation of retirement researchers.
So it is unsurprising that a jury of his distinguished peers has honored Poterba, who is also president of the National Bureau of Economic Research (NBER), with the Retirement Income Industry Association’s (RIIA) award for applied retirement research.
That award, sponsored by AdvisorOne and Research Magazine, will be presented at a ceremony in Boston at RIIA’s annual conference in October. But following the announcement of the award last week, Poterba has shared some of his award-winning perspective with AdvisorOne readers.
The practical, advisor-useful research for which Poterba has been recognized is fully displayed in the most recent study the MIT economist has conducted, together with Steven Venti of Dartmouth and David Wise of Harvard.
In a landmark study NBER published in February, Poterba and his fellow researchers showed that nearly half of all Americans die with financial assets of less than $10,000. The study further found that many of the families observed had no housing or private pension assets either, thus relying exclusively on Social Security.
The researchers eschewed the retirement readiness index and other measures that merely try to figure out where people stand at the beginning of retirement.
“That’s like asking: ‘Am I leaving enough time to get to the airport?’” Poterba says. Maybe not on a day when authorities have closed off a key road, he answers.
So Poterba and his colleagues examined the issue from the opposite perspective. Instead of looking at the beginning of retirement, Poterba says “you can look at a different time clock: the date of death and looking back from there”—using a regularly updated data set based on two decades of biannual surveys of the asset and health dynamics of elderly Americans.
Looked at this way, Poterba says one can see that many “households reached retirement with a reasonably substantial level of financial assets, but by the time we see them at the end of life, their assets have dropped.” And of course there are households that both begin and end retirement with a low level of assets. But the data show that there are many financial shocks that can emerge at the end of life—the cost of modifying a home, the cost of moving to be near caregivers, out-of-pocket medical costs, to name just a few. And these shocks produce a great deal of heterogeneity in financial experiences in retirement, variation that is difficult to capture in summary measures such as a retirement readiness index.
The study thus replaces a static image of investing whereby a household saves for retirement, and then dis-saves on a precise income distribution schedule, with a more dynamic understanding of retirement realities.
What does tend to get drawn down in a regular and predictable way are Social Security and defined-benefit pension assets, which leads to questions regarding the value of annuities.