The typical older household in the United States now arrives at retirement with an array of financial resources. These resources usually include home equity, vehicles, and bank accounts and may also include financial assets such as Individual Retirement Accounts (IRAs) and stocks or other property like small businesses and real estate. These assets are important for the financial security of older households. Households may use them to finance routine consumption in retirement or reserve them to cope with the financial consequences of a negative event like the death of a spouse. Households’ ability to manage their assets in retirement is becoming more important over time, as the shift towards defined contribution pension plans means that households are more likely to receive their pension as a stock of assets at retirement rather than as a flow of monthly benefits. Older households hold a sizeable share of total U.S. household net worth, so the spend-down patterns of these households may affect asset markets, particularly as the large baby boom cohort enters retirement. This brief examines what happens to household portfolios after retirement. It analyzes how portfolios evolve with age and how health shocks such as the death of a spouse or a heart attack or stroke affect the composition of household portfolios. The data come from the Health and Retirement Study (HRS), using data from 1992-2002. The results show large changes in asset holdings with age. The ownership rates for homes and vehicles fall dramatically, while the share of assets invested in bank accounts and Certificates of Deposit (CDs) rises. Health shocks play a key role in explaining these changes in household portfolios. Experiencing a health shock like widowhood is a strong predictor of selling one’s home, vehicle, and business or other real estate and of shifting money into bank accounts and CDs. Poor physical or mental health amplifies these responses. These findings suggest that factors other than standard risk and return considerations weigh heavily in the portfolio decisions of many older households.
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Paper provided by Center for Retirement Research in its series Issues in Brief with number
ib2006-56.
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