Working Paper: NBER ID: w17536
Authors: James M. Poterba; Steven F. Venti; David A. Wise
Abstract: This paper presents evidence on the resources available to households as they enter retirement. It draws heavily on data collected by the Health and Retirement Study and calculates the "potential additional annuity income" that households could purchase, given their holdings of non-annuitized financial assets at the start of retirement. Even if households used all of their financial assets inside and outside personal retirement accounts to purchase a life annuity, only 47 percent of households between the ages of 65 and 69 in 2008 could increase their life-contingent income by more than $5,000 per year. At the upper end of the wealth distribution, however, a substantial number of households could make large annuity purchases. The paper also considers the role of housing equity in the portfolios of retirement-age households, and explores the extent to which households draw down housing equity and financial assets as they age. Many households appear to treat housing equity and non-annuitized financial assets as "precautionary savings," tending to draw them down only when they experience a shock such as the death of a spouse or a period of substantial medical outlays. Because home equity is often conserved until very late in life, for many households it may provide some insurance against the risk of living longer than expected.
Keywords: retirement; wealth; annuity; housing equity; financial assets
JEL Codes: D14; D91; J14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| limited non-annuitized financial assets (G19) | restricted capacity to increase life-contingent income through annuity purchases (G52) |
| financial asset levels (G19) | annuity purchasing capacity (G52) |
| housing equity (R21) | precautionary savings (D14) |
| significant shocks (medical expenses, death of spouse) (D14) | draw down housing equity (G51) |
| health shocks (I12) | changes in asset levels (G19) |
| changes in asset levels (G19) | influence retirement security (J26) |