Many retirees do not draw down their assets in a smooth or predictable way, according to new research report from the Employment Benefit Research Institute. Access to guaranteed streams, such as defined benefit pension income, may help them preserve assets and manage future financial shocks, the report said.
For advisors, the findings reinforce the importance of evaluating clients' retirement preparedness not only by asset balances at retirement, but also by the availability of reliable income streams and the evolution of assets over the full retirement period.
"This research shows that retirement asset drawdown is far more complex than a simple spend-down pattern," Leslie Muller, senior research associate at EBRI, said in a statement. "For many households, especially those with limited assets, the presence of predictable lifetime income appears to be closely associated with greater financial stability and a stronger ability to preserve assets for unexpected expenses later in retirement. "
EBRI used longitudinal data from its 1992-2022 Health and Retirement Study to examine how household net non-housing assets change over retirement. The research examined three groups: low-asset households, those with less than $200,000 (in 2022 dollars); mid-level households, with assets of $200,000 to $499,000; and high-asset households, with assets of $500,000 or more.
Key Findings
From years 1-2 of retirement to years 21-22, median household net non-housing assets fell by 43% for low-asset households, by 30% for middle-asset households and by 42% for high-asset ones. The middle- and high-asset groups exhibited a smoother decline than the low-asset group.
All asset groups experienced significant asset retention, and even accumulation, by years 21-22. Thirty-seven percent of the low-asset group preserved at least 80% of their asset value, with 33% retaining 100% or more of their retirement assets.
Forty-eight percent of the middle-asset group and 42% of the high-asset group had 80% or more of their starting assets remaining at years 21-22. And 43% of the former and 31% of the latter had 100% or more of their assets at the end of the sample period.
While 40% of middle-asset and 43% of high-asset retirees had less than 50% of their starting assets left by years 21-22, 54% of the low-asset group did. With a median assets of $34,089 in years 1-2 years after retirement, more than half of this group had $17,000 or less remaining by years 21-22.
Median assets of both the low- and middle-asset retirement groups fell less sharply by years 21-22 if at least one person in the household had defined benefit pension income. For low-asset retirees without consistent income flows, median assets fell by 89% at years 21-22, compared with 29% for those with defined benefit income.
Recipients of defined benefit income during retirement drew down assets more slowly and experienced greater financial stability throughout their post-work years. In households with low pre-retirement assets, the absence of pension income was associated with almost complete asset depletion in late retirement.
EBRI's Commentary on Findings
EBRI's research found that people who retire with less than $200,000 in net non-housing assets experienced declines in asset values similar to those who started retirement with higher asset levels. However, because this group began retirement with median assets of only $34,000, even a similar decline may leave them with a minimal financial cushion, making them more vulnerable to late-life shocks.
In contrast, retirees who start retirement with higher levels of assets are likely better positioned to deal with unexpected expenses more comfortably.
The analysis also determined that about a third of retirees still have 100% or more of their initial assets remaining by their mid-80s. Although outliving savings is often viewed as the primary concern in retirement, EBRI said, it is also important for retirees to use their resources in ways that support consumption, security, autonomy and intended bequests.
It noted that high or rising asset balances may be concerning if they reflect unnecessary underspending, inefficient self-insurance or the use of tax-advantaged accounts primarily for wealth transfer rather than retirement support.
The report pointed out that the cohort EBRI examined benefited from relatively high rates of defined benefit pension income across all asset groups — a benefit unlikely to accrue to future retirees.
Social Security provides most retirees with a stable stream of lifetime income, but it may be insufficient on its own to sustain consumption or support a comfortable standard of living, particularly for retirees with limited assets. Many future retirees may enter retirement without an additional stable, lifetime source of income to supplement Social Security.
"As more retirees rely on defined contribution plans rather than traditional pensions, understanding how savings can be converted into sustainable income will become increasingly important for employers, plan providers, policymakers and retirees themselves," EBRI's Muller said.
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