Asset Decumulation Research Articles

The effect of required minimum distributions on intergenerational transfers

Tax policy may influence intergenerational transfers, especially the method and timing of gifts. In this paper, I study how tax rules that mandate the decumulation of retirement savings accounts impact transfers from parents to children. Using data from the Health and Retirement Study and a regression discontinuity design, I estimate the causal effects of aging into Required Minimum Distribution (RMD) regulations, which mandate withdrawals from retirement accounts upon reaching a specified age. First, I establish the effects of RMDs on asset decumulation in my setting and show a sharp increase in withdrawals from Individual Retirement Accounts (IRAs). Next, I provide new evidence on the effects of RMDs on intergenerational transfers and show a concurrent, discontinuous increase in inter vivos gifts. The results indicate that some households ultimately use IRAs to facilitate within-family transfers, holding wealth in the tax-advantaged accounts until required to take distributions and then passing resources to children.

The Retirement Consumption Puzzle: A Mental Accounting Explanation

Recent developments in cognitive psychology and behavioral economics may explain the lower-than-predicted asset decumulation behavior posited by traditional life-cycle models during retirement, dubbed the retirement consumption puzzle. This study examines if mental accounting could be used to explain the retirement consumption puzzle. Utilizing panel data collected from the 1992–2018 Health and Retirement Studies, retiree age and age squared are examined using fractional polynomials and fixed effects regressions for their associations with varying categorical retiree asset decumulation patterns, including retiree wealth, nonhousing wealth, stocks, retirement accounts, bonds, liquid assets, vehicles, primary residence, and home equity. The results suggest that varying asset decumulation behaviors exist among retirees, which could be explained by retirees’ discretionary spending propensities. The discussion highlights the importance of understanding retiree behavioral spending constraints to allow for smooth consumption paths.

Translocal vulnerability of temporary rural–rural labor migrant-sending households in Quarit district, Northwestern Ethiopia

The current era of globalization is accompanied by vulnerabilities of migrants at their destination. Although such cases possibly shape the vulnerabilities of migrant-sending households through the network of migration, most studies give little attention to these spatial vulnerabilities. Informed by the translocal approach, this article attempts to bridge this gap based on a mix of quantitative and qualitative data generated from households that send temporary labor migrants to export-oriented cash crop growing areas in Ethiopia. Quantitative data were collected from randomly selected 250 migrant-sending households and analyzed using descriptive statistics. Qualitative data meant to support quantitative data were gathered before and after collecting quantitative data through focus group discussions, key informant interviews and a review of secondary sources. The findings demonstrate that temporary rural–rural labor migrants are vulnerable to multiple shocks at their destination. These vulnerabilities of migrants are transferred to migrant-sending households through migration networks and result in various degrees of negative livelihood outcomes such as asset decumulation and food insecurity depending on the type of migrant-households. It is learned, in this case, that a localized approach to vulnerability analysis appears inadequate in revealing the whole spectrum of vulnerability. The implication is that efforts meant to address migration-related vulnerability require coordinated responses involving actors situated both at the origin and destination of migrants. Interventions to address migration-related vulnerability also require mainstreaming migration into national development policies and strategies designed based on a translocal approach.

Spillovers of Community-Based Health Interventions on Consumption Smoothing

Community-based interventions, particularly group-based ones, are considered to be a cost-effective way of delivering interventions in low-income settings. However, design features of these programs could also influence dimensions of household and community behaviour beyond those targeted by the intervention. This paper studies spillover effects of a participatory community health intervention in rural Malawi, implemented through a cluster randomised control trial, on an outcome not directly targeted by the intervention: household consumption smoothing after crop losses. We find that while crop losses reduce consumption growth in the absence of the intervention, households in treated areas are able to compensate for this loss and perfectly insure their consumption. Asset decumulation also falls in treated areas. We provide suggestive evidence that these effects are driven by increased social interactions, which could have alleviated contracting frictions; and rule out that they are driven by improved health or reductions in the incidence of crop losses.

Degraded Rationality and Suboptimal Decision-Making in Old Age: A Silent Epidemic With Major Economic and Public Health Implications.

Sound decision-making is important for success and well-being in all stages of life but is critical in old age, when many complex and influential decisions are made and opportunities to correct mistakes are limited. Decisions related to financial and health matters are of utmost importance for older adults and have far-reaching implications. Older adults control most household wealth in the United States and face a host of difficult financial decisions related to Social Security distributions, asset decumulation, intergenerational transfers of wealth, and more. Older adults also suffer a disproportionate burden of disease and face complex medical decisions related to chronic disease management and end-of-life care. Adding to the complexity of late-life decision-making, many choices older adults face involve novel considerations and inherent uncertainty; for example, effective management of limited retirement funds requires an estimation of one’s own life expectancy. Despite a lifetime of experience with decision-making, accumulating evidence suggests that many older adults struggle with financial and health decision-making. Older adults often take Social Security distributions too early (resulting in a significant long-term financial disadvantage), engage in unsound investments and risky credit/spending behaviors, and fail to take advantage of financial and health-care benefits. Perhaps even more alarming, older adults are highly vulnerable to financial exploitation and lose more than $30 billion annually in the United States alone. Further, recent Federal Trade Commission survey data suggest a disturbing increase in losses, with adults >60 years losing more than younger adults and considerably higher dollar amounts than their peers in prior years. Losses nearly doubled from 2019 to 2020 among individuals >80, the fastest-growing segment of the population. Further compounding the economic challenge is a looming public health crisis. Financial exploitation is associated with a range of adverse health outcomes, including depression, hospitalization, and early mortality. Indeed, the National Council on Aging dubbed scams against the elderly the “crime of the 21st century” and the Centers for Disease Control and Prevention and other federal agencies have called for immediate and intense efforts to address financial exploitation among older adults.

Defined Contribution Plans: Challenges and Opportunities for Plan Sponsors

American workers rely on their employers to provide a way to generate retirement income beyond their Social Security earnings. Many employers still offer traditional defined benefit (DB) pension plans. A growing majority, however, have replaced DB plans with account-based defined contribution (DC) plans. Virtually everyone acknowledges that the basic DC plan design is flawed. Yet as a society with low private savings and a fraying Social Security system, we count on this imperfect structure to serve as a retirement security bulwark. Workers and society both need the employer-sponsored retirement system to function well. Enhancing DC plan design therefore becomes critical. Defined Contribution Plans: Challenges and Opportunities for Plan Sponsors offers guidance to plan sponsors interested in better understanding the primary issues confronting DC plans. We wrote this book from the viewpoint of the plan sponsor seeking to improve the DC system, and it follows five major themes: the plan participant, the plan sponsor, plan design, investments and investment managers, and asset decumulation in retirement. We present the material conversationally from a high-level perspective. We have not sought to write an encyclopedia on DC plans but rather focus on the basic features of well-run plans. We address key challenges facing DC plans and offer associated design and policy recommendations for plan sponsors and other interested parties to consider. Plan design improvements almost certainly will be incremental, rather than sweeping top-down changes mandated by regulators. Plan sponsors individually will make the important decisions that have lasting consequences for participants and for society. Our objective is to spark interest among sponsors, encouraging them to carry out additional research and take action. We believe the DC system will be strengthened by informed sponsors advocating for and implementing thoughtful strategic changes to their plans.

Using Bank Savings Product Design for Empowering Women and Agricultural Development

This study examines whether the random allocation of single and joint saving accounts to cash crop farmers in rural Ethiopia is associated with changes in decision-making authority and control over resources that ultimately lead to changes in labor effort, schooling allocations, income, consumption, agricultural investments, and crop output. Women and children work more when joint deposit accounts are available. Likewise, meaningful effects on school participation are reported for girls. Consistent with posited channels of intrahousehold bargaining models, women from households assigned to the joint saving treatment group show significant gains in autonomy and control of savings resources, and financial empowerment. While we find substantial gains in subjective wellbeing for single and joint account experimental groups, no meaningful impacts on agricultural crop output, income, and consumption are found. However, a systematic decumulation of livestock assets is observed across households assigned to the joint account treatment group.

Low Demand for Reverse Mortgages in Canada: Price, Knowledge or Preferences?

High borrowing costs, limited knowledge and preferences could explain why few Canadians purchase reverse mortgages, an asset decumulation product that is appealing to those who are house-rich but cash-poor. In this paper, we first use an asset pricing model to calculate the actuarial fair costs of guarantees built into reverse mortgage products in Canada and compare those estimates to prevailing interest rates in the market for these products. We also investigate whether Canadians understand reverse mortgages and whether low demand originates on the preference side by conducting a stated-preference experiment with 3000 Canadians. We manipulate characteristics of reverse mortgages, including the interest rate, to tease out how sensitive Canadians are to these characteristics. Our results suggest that observed interest rates are high relative to actuarially fair rates and that consumers are somewhat price sensitive in addition to demonstrating little knowledge of these products and low demand overall.

Extending the Goals-Based Framework to Comprise Both Investment and Financial Planning

This article seeks to fill a void in the literature on goals-based planning. Most of the current work covers cases where clients already possess significant financial assets that they plan on totally or partially spending down, through expenses as well as various dynastic or philanthropic transfers. Yet, planners—be they focused on income/savings/expense management issues or conduct their work in the asset management sphere—have to deal with at least two other potential cases. Our analysis suggests that the goals-based planning approach has the potential to inject more texture into conversations with all clients. It also shows that there are significant, and at times even dramatic, differences in the ways one might deal with (1) an individual who is already wealthy and spending down his or her wealth, (2) another who may be wealthy but has unrealized nonfinancial wealth and ongoing current savings inflows, and (3) yet another who has a significant income and savings power but not enough accumulated financial wealth to live on. This is nothing more than the classical case of the difference between human and financial capital. Individuals in an asset decumulation mode have more financial than human capital, while those who are in an accumulation mode have more human than financial capital. As one might expect, this describes a full spectrum, and our “accumulation/decumulation case” falls somewhere between these extremes. <b>TOPIC:</b>Wealth management <b>Key Findings</b> • Goals-based wealth planning is the discipline most likely to help individuals and families achieve their goals, over the desired time horizons and with the desired sense of urgency or required probability of success and combines elements of both investment and financial planning. • There are three different personal finance scenarios that must be considered, rather than the sole wealth decumulation case usually considered. People still accumulating wealth also need help, whether they already have meaningful financial savings or are only starting to build them. • Though each scenario requires some change to the well-documented asset decumulation approach, they all benefit from the fact that discount rates used to evaluate future goals are both time-horizon and required-success-probability adjusted. • This approach may allow the creation of a completely new fee paradigm where advisory fees are based not on assets under advice but on measured progress toward the client’s goals.

THE EFFECTS OF REQUIRED MINIMUM DISTRIBUTION RULES ON WITHDRAWALS FROM TRADITIONAL IRAs

We study the effects of required minimum distribution (RMD) rules on the asset decumulation behavior of retirees with traditional individual retirement arrangements (IRAs). Using a nationally representative panel of 1.8 million IRA holders from 2000 to 2013, we estimate that around 50 percent of individuals would prefer to withdraw less than their required minimum. However, we also estimate that up to 38 percent of these RMD-constrained individuals did not respond to a temporary suspension of RMD rules in 2009.

Drawing down Retirement Wealth: Interactions between Social Security Wealth and Private Retirement Savings

Individual financial planning for retirement in the US is increasingly important, given the trend away from employer-provided defined benefit (DB) plans, the rising Social Security (SS) Full Retirement Age (FRA), and retiring baby boomers. A key financial decision that Americans make is how to draw on their retirement wealth across various sources, including both privately saved retirement funds and SS benefits. For SS retirement benefits, the main decision is at what age to claim, with claiming before the FRA resulting in lower monthly benefits, and claiming later leading to higher benefits. The terms of this tradeoff have changed in recent years: since 2003, the FRA has risen from 65 and will gradually increase to 67 by 2027, representing a drop in the present value of SS benefits. Meanwhile, defined contribution (DC) plans have gained in popularity, presenting retirees with more control over their private retirement wealth. The changing dynamics of both SS wealth and the private retirement decision space underscore the need for examining how individuals make decisions across their entire portfolio of retirement wealth. We use HRS survey data matched to SS administrative data to study how households integrate SS benefits into their general retirement income plans. We find starkly different non-SS retirement asset decumulation patterns across individuals who claim at different ages, with those claiming before the FRA drawing down pension and IRA wealth faster than those who claim at or after the FRA. However, the earliest claimants, those who claim SS retirement benefits exactly at age 62, are a highly heterogeneous group, consisting of both low-income, high expected mortality individuals as well as individuals with high pension holdings. We further find that this earliest claimant group is more likely to have retired and begun decumulating non-SS retirement assets even before age 62; however, this group’s median and average assets are not substantially lower than later claimants. An analysis of claiming behavior by non-SS retirement wealth holdings shows that individuals with more retirement savings were overwhelmingly likely to claim between the ages of 62 and the FRA. On the other hand, those with the least retirement savings are more likely to either claim SS benefits as early as possible, either in the form of disability benefits or retirement benefits, or they would delay claiming SS retirement benefits until after the FRA. Moreover, birth cohorts facing higher FRAs tend to delay claiming SS retirement benefits on average; however, those most affected by this reduction in SS wealth – those with few other retirement assets – are the least reactive. Finally, households that do delay claiming as the FRA rises also tend to delay retirement and drawing down their non-SS retirement assets, indicating complementarity between SS and non-SS decumulation decisions and strong spillovers from changes in both SS and private retirement policy.

The Effect of Required Minimum Distribution Rules on Withdrawals from Traditional Individual Retirement Accounts

Traditional Individual Retirement (IRAs) are a substantial source of retirement savings. In 2013 individuals age 60 or older held $3.8 trillion in wealth in IRAs. Current law requires that some fraction of these funds be withdrawn each year beginning the year one turns 70.5 years of age, with the fraction increasing in age. We study the effects of these Required Minimum Distribution (RMD) rules on the asset decumulation behavior of retirees using a panel of administrative tax data from 1999 to 2014. This period encompasses a one-year suspension of the RMD rules in 2009, which we exploit for identification. Though the RMD rules are modest -- leaving one third of the original balance intact by age 90 even if investments generate zero returns -- they have substantive effects on behavior. We estimate that 52% of individuals subject to the rules would prefer to withdraw less than their required minimum but that over one third of these RMD-constrained individuals do not adjust their withdrawals in response to temporary changes in the rules. As further evidence that paying attention to the rules is costly, we find that individuals newly subject to RMD rules are disproportionately likely to close their IRAs. This paper is the first to study this effect of RMD rules and to show that the rules represent a binding constraint for the majority of IRA holders.The appendix for The Effects of Required Minimum Distribution Rules on Withdrawals from Traditional Individual Retirement Accounts may be found at http://ssrn.com/abstract=2859088.

Consumer Preferences for Annuity Attributes: Beyond Net Present Value

Decisions about life annuities are an important part of consumer decumulation of retirement assets, yet they are relatively underexplored by marketing researchers studying consumer financial decision making. In this article, the authors propose and estimate a model of individual preferences for life annuity attributes using a choice-based stated-preference survey. Annuities are presented in terms of consumer-relevant attributes such as monthly income, yearly adjustments, period certain guarantees, and company financial strength. The authors find that these attributes directly influence consumer preferences beyond their impact on the annuity's expected present value. The strength of the direct influence depends on how annuities are described: when annuities are represented only through basic attributes, consumers undervalue inflation protection, and preferences are not monotonically increasing in duration of period certain guarantees. When descriptions of annuities are enriched with cumulative payment information, consumers no longer undervalue inflation protection, but nonlinear preferences for period certain options remain. The authors find that among annuities with the same expected payout but different annual increases and period certain guarantees, the proportion of consumers who choose the annuity over self-management can vary by more than a factor of 2.

Cognitive Ability and Post-Retirement Asset Decumulation

Post-retirement asset decumulation decisions are complex and may be affected by cognitive abilities. Estimating uncertainties such as life expectancy and medical costs, and incorporating them effectively into decumulation decisions may be especially difficult as retirees face age-related changes in cognition. This may result in rates of decumulation that are contradictory to the goals that motivated accumulation, leading to potentially large utility losses. We investigated the relevance of cognitive ability to asset decumulation decisions within our sample. We found that cognitive ability was a significant predictor of the rate of asset decumulation, and that those with lower levels of cognitive ability were decumulating at a significantly lower rate. We also showed that the level of cognitive ability influenced the effects of expected longevity, market returns, and medical costs. While the estimates for these factors were consistent between those with high and low cognitive ability, there were significant differences in how the estimates were incorporated into the asset decumulation decisions of the two groups.

The Retirement Consumption Gap: Evidence from the HRS

Research on post-retirement asset decumulation shows that many retired households are consuming from their financial assets at a very slow rate or not at all. Factors commonly associated with this phenomenon are the complexity of decumulation decisions, uncertain longevity and medical costs, home production, and bequest motives. Using a product allocation framework and data from the Health and Retirement Study we provide evidence of a retirement consumption gap for those with financial assets in the third, fourth, and fifth quintiles. In comparison to previous studies that focus on changes in financial asset values over time to examine post-retirement consumption, our methodology provides a more dynamic evaluation of consumption behavior and quantifies the consumption available to and forgone by retirees under a variety of asset allocation strategies. When incorporating the effects of uncertain longevity, uncertain medical costs, and bequests we find that retirees with median wealth have a consumption gap of approximately 8% on average and that retirees with higher levels of wealth have a consumption gap as high as 45.6%. We discuss the implications of these findings and considerations for future research addressing this topic.

Cognitive Ability and Post-Retirement Asset Decumulation

There is evidence that retirees are decumulating their assets very slowly or not at all. This behavior does not follow the normative framework of the life-cycle hypothesis (LCH). Decumulating in a manner that maximizes expected utility is a complex process that requires the estimation and input of multiple factors when analyzing consumption alternatives. As a result, the decumulation decisions of retirees may be impacted by their cognitive ability. Evidence suggests that cognitive ability is relevant to financial decisions and that the presence or absence of cognitive ability is important when considering choices in combination across multiple time periods. We find that both life-cycle factors and cognitive ability are significant predictors of the rate of asset decumulation, and that those with higher levels or cognitive ability are decumulating at a significantly higher rate. We also show that the level of cognitive ability influences the effects of expected longevity, market returns, and medical costs. While the estimates for these factors are consistent between those with high and low cognitive ability, there are significant differences in how the estimates are incorporated into the asset decumulation decisions of the two groups.

Cognitive Status, Self-Control, & Asset Decumulation: Evidence from the HRS

Evidence suggests cognitive ability is important when making financial decisions. The presence or absence of cognitive ability is important in estimating the likelihood of uncertain events, considering choices in combination across multiple periods, and recognizing the need for commitment to combat inconsistent preferences and deficiencies in self-control. Given the negative relationship between cognitive ability and age, retirees may be affected as their ability in these areas diminishes. Self-control, or a lack there of, may also impact the consistency of preferences and behavior over time. When making asset decumulation decisions retirees are likely influenced by both their long-term concerns and short-term emotions. These competing forces highlight the importance of self-control on one’s ability to carry out long-term consumption goals. Thus, self-control may help explain variation in retirement spending and the risk of asset depletion in old age. We explore the relationship between cognitive status – the presence or absence of notable cognitive decline – self-control, and asset decumulation among retired households in the United States. After controlling for age, initial wealth, stock ownership, and income our findings indicate that cognitive status is important in determining the rate of asset decumulation.

Should Households Base Asset Decumulation Strategies on Required Minimum Distribution Tables?

Retired households must trade off the risk of outliving their wealth against the cost of unnecessarily restricting their consumption. Using numerical optimisation techniques, we compare two innovative rules of thumb: (1) consuming the age-related percentage of remaining wealth specified in the Internal Revenue Service (IRS) Required Minimum Distribution (RMD) tables, and (2) consuming the age-related percentage of remaining wealth specified in the IRS RMD tables PLUS interest and dividends, with alternative rules of thumb and with the theoretical optimal. We show that in models that incorporate uncertain investment returns, the second RMD strategy (spending age-related percentages of remaining wealth PLUS interest and dividends) performs better than plausible alternatives, such as spending the interest and dividends, consuming an inflation-indexed 4 per cent of initial wealth, or decumulating over the household’s life expectancy. Importantly, except for more risk-averse single males, it also performs better than the purchase of a market-load inflation-indexed annuity, and approaches the theoretical optimum.

Should Households Base Asset Decumulation Strategies on Required Minimum Distribution Tables?

Households managing wealth decumulation in retirement must trade off the risk of outliving their wealth against the cost of unnecessarily restricting their consumption. Devising an optimal decumulation plan, reflecting uncertain mortality and asset returns, is well beyond the abilities of most households, who likely rely on rules of thumb. Using numerical optimization, we compare one such rule of thumb – consuming the age-related percentage of remaining wealth specified in the IRS Required Minimum Distribution (RMD) tables – with alternatives and with the theoretical optimal. We show that in models that incorporate uncertain investment returns a decumulation strategy based on the RMD tables performs better than plausible alternatives, such as spending the interest and dividends, consuming a fixed 4 percent of initial wealth, or decumulating over the household’s life expectancy. The RMD tables generally result in too little wealth being consumed at younger ages, and are, therefore, relatively attractive to households with low inter-temporal elasticities of consumption. But all the above strategies fall well short of the theoretical optimum.

Budget Deficits and Exchange-Rate Crises

This paper investigates currency crises in an optimizing general equilibrium model with overlapping generations. It is shown that a rise in government budget deficits financed by future taxes generates a decumulation of external assets, leading up to a speculative attack and forcing the monetary authorities to abandon the peg.