How retirees manage: Wealth after work

1. How retirees manage: Wealth after work Susan Thorp University of Technology Sydney Negotiating the Retirement Risk Zone December 2013

2. Financial management • How fast do retirees spend their nest eggs? • How many retirees use up virtually all their financial wealth early? • What happens to portfolio allocations as retirees age? • Which is the biggest risk: health costs or poor investment returns?

3. Who are we studying? • Retired households from HILDA – annual survey of 7,000 households • 2002, 2006 and 2010 survey wealth • Follows around 900 households • Nine asset classes: liquid assets; cash investments; superannuation; equity in principal residence; business; real estate; vehicles; ‘other’ • Gross assets = Sum of all nine asset classes • Wealth = gross assets less debt lessequity in family home

4. Decumulation rates vary by age and time. Average wealth ($) by age 65 75 85 65 75 85 • 2002-06 • 55% households decreased wealth by average 20% p.a. • 45% households increased wealth by average 19% p.a. • At median, wealth fell $4K p.a. • 2006-10 • 60% households decreased wealth by average 20% p.a. • 40% households increased wealth by average 22% p.a. • At median, wealth fell $1.5K p.a. 2002 2006 2010

5. Decumulation varies by asset allocation. Average wealth ($) by asset allocation >50% in growth >50% in safe 2010 • Large falls for households with more than 50% of financial wealth in super/equity • Dramatic loss in 2006-10 • Smallest falls for households with least concentrated portfolios 2006 2002 2010

6. How fast do retirees spend their nest eggs? • Wealth ex-residence falls by around 2-3% p.a. until older ages, then slows • Averages decreases mask huge variation between households and over time • Retirement income products with market risk should offer flexibility in minimum withdrawal rates. • Allow for precautionary savings

7. Around 7% of households have less than 3 weeks of the ASFA ‘modest’ budget in savings.

8. How many retirees use up virtually all their financial wealth early? • Around 7% have less than 3 weeks ASFA modest budget • Around 10% have less than 12 weeks • Around 18% have less than 24 weeks • Around 28% have less than 48 weeks • Rates of wealth exhaustion increase between 2006-10 • Couples, home owners, precautionary savers, healthy are less likely to run out • Having very low financial wealth DOES NOT induce people to sell their houses

9. What happens to portfolios as people age? 1. Participation

10. What happens to portfolios as people age? 2. Allocations

11. Increasing conservatism with age • Lower participation in all asset classes with age (apart from cash) • Share of superannuation falls by 0.4 percentage points with each year of age • Share of principal residence rises by 6.4 percentage points with each year of age • Home ownership peaks around age 74 • Share of cash rises by 0.6 percentage points with each year of age

12. Which is the biggest risk, health costs or poor investment returns? • Households spend cash when INbad health • Households that EXPECT bad health save cash • Few health impacts in this sample – excludes people living in nursing homes • Average share of expenditure on health is around 3%

13. Lump sum: (50% retirement payouts) invest outside the superannuation system Income stream: (50% retirement payouts) Account-based pension: Around 98% of income streams, by assets Annuity: Around 2% term annuity, small sales of new life annuities Hybrid longevity products: minimum payment guarantee ** Reverse mortgage: around 42,000 current loans, mainly lump sums Payouts from superannuation: 2012 13

14. Financial management How fast do retirees spend their nest eggs? Average retired Australian household gained in 2002-06 and lost in 2006-10, in line with financial market trends (and more diversified households did better). How many retirees use up virtually all their financial wealth early? Around 7% of retired households have less than 3 weeks of the modest ASFA budget in financial wealth. Low wealth numbers got worse over time.

15. Financial management What happens to portfolios as retirees age? Older households prefer less risk and more liquidity, while holding on to the family home. Which is the biggest risk, health costs or poor investment returns? The effect of health shocks is minimal. Investment returns have dramatic effects.

16. Policy discussion Minimum income draws from allocated pensions can be a binding constraint Older people spend slower; housing wealth is preserved Inflexibility when combined with financial shocks is problematic in retirement income products Need for guarantees and/or drawdown flexibility

17. Acknowledgements: • Alexandra Spicer, UTS • Olena Stavrunova, UTS This research uses unit record data from the Household, Income and Labour Dynamics in Australia (HILDA) survey. The HILDA Project was initiated and is funded by the Australian Government Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA) and is managed by the Melbourne Institute of Applied Economic and Social Research (MIAESR). The findings and views reported in this article, however, are those of the author and should not be attributed to either FaHCSIA or MIAESR. Thorp acknowledges support from ARC DP120102239. The Chair of Finance and Superannuation, UTS, (Thorp) receives support from the Sydney Financial Forum (through Colonial First State Global Asset Management), the NSW Government, the Association of Superannuation Funds of Australia (ASFA), the Industry Superannuation Network (ISN), and the Paul Woolley Centre for the Study of Capital Market Dysfunctionality, UTS.