Encouraging Data on Retiree Dis-saving Rates

by: James Bacon

Whither U.S. household savings rates? After bottoming out during the Bush-era expansion, savings have pushed back up to the 5%- to 6%-per-year rate. That’s a far cry from the 10% annual household savings rate that prevailed as recently as the 1970s but it is an improvement. Will rates continue to climb, or is this the best that the consumption-obsessed, debt-addicted American public do?

I have long assumed that savings rates would head back down. As the Boomer generation retires, moving out of its peak-savings years of middle age and into a phase of life where they earned no income from wages and salaries, I expected that they would draw down their savings and, in so doing, depress the general saving rate. That prospect concerned me because a surfeit of saving would contribute to rising interest rates and make it all the more difficult for the U.S. Treasury to borrow the prodigious sums it requires to run the government.

Now comes a study to suggest that the savings decline among retiree households may not be as precipitous as I assumed. In their paper, “The Drawdown of Personal Retirement Assets,” by James M. Poterba, Steven F. Venti and David A. Wise have studied what people did with the money in their personal retirement accounts like 401(k)s, IRAs and Keoghs — which totals roughly $7 trillion today — between 1997 and 2005. Instead of using them to fund their ongoing retirement lifestyles, most Americans deferred tapping their retirement accounts until they were required to, at at 70 1/2, and even then, they pulled out so little that the value of the accounts managed to grow somewhat over time.

Say the authors:

Our central finding is that PRA assets, like home equity, tend to be conserved in the early retirement years. Withdrawal rates are low following retirement until account-holders attain age of 70 1/2. …

At age 70 1/2, the proportion of households reporting withdrawals jumps from about 20 percent to over 60 percent. Despite the large jump in the probability that assets are withdrawn at this age, the overall proportion of assets withdrawn continues to be a small proportion of the PRA balance. This withdrawal ratio average between one and two percent between ages 60 and 69, and rise to about 5 percent at age 70 1/2. … It is possible for average PRA assets to rise with age, even after age 70 1/2.

What’s going on? The authors theorize that retirees hold onto their PRAs as a “rainy day” fund to cover contingencies such as major medical bills or entry into a nursing home. This behavior is totally logical. AN EBRI study cited in the paper found that men approaching retirement will need anywhere from $68,000 to $173,000 to have a 50/50 chance of covering insurance premiums and out-of-pocket medical expenses in retirement.

Conclude the authors: “Having some liquid assets to draw on in an emergency is valuable, and for many households PRA assets may be the single largest source of liquid assets.”

These findings suggest that most retirees have enough sense to conserve resources to pay for unplanned medical and long-term-care episodes. Likewise, it suggests that the drawdown of financial resources will take place over a decade or two, buffering the impact of the wave of baby boomers entering retirement age upon the national saving rate.

I have only one question: Will boomers exhibit the same behavior as the Silent Generation retirees covered under the study? Boomers have never displayed the thrift and financial caution that their elders did. Have they learned from their experience in the Global Financial Crisis, or will they revert to their old ways? The nation’s fiscal and economic future hangs upon the answer.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.