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Pre-Retirement Cashouts and Foregone Retirement Saving: Implications for 401(k) Asset Accumulation

Listed author(s):
  • James M. Poterba
  • Steven F. Venti
  • David A. Wise

This paper presents new evidence on the potential importance of 401(K) assets in contributing to the retirement resources of future retirees. We use data on past 401(k) participation rates by age and imcome decile, along with information on average 401(k) contribution rates, to project the future 401(k) contribution trajectories of households that are currently headed by individuals between the ages of 29 and 39. We allow for the possibility of pre-retirmenet withdrawal of 401(k) assets when individuals experience employment transistion. By combining data from the Health and Retirement Survye on the likelihood of 'cashing out' a 401(k) account conditional on a job change, with data from other sources on the probability of job change, it is possible to estimate the prospective pre-retirement 'leakage' from 401(k) accounts. Our central findings are that for households reaching retirement age between 2025 and 2035, 401(k) balances are likely to be a much more important factor in financial preparation for retirement than they are today. We estimate that average 401(k) balances in 2025 will be between five and ten times as large as they are today, and would represent one-half to twice Social Security wealth (depending on investment allocation and based on current Social Security provisions). For persons retiring in 2035 we estimate that 401(k) balances will be three-quarters to two and one-half times Social Security wealth. Moreover, we find that pre-retirement withdrawals have a small effect on the balance in 401(k) accounts. We estimate that these withdrawals typically reduce average 401(k) assets at age 65 by about five percent. This is largely because most households who are eligible for a lump sum distribution when they change jobs choose to keep their accumulated 401(k) assets in the retirement saving system. These households either leave their assets in their previous employer's 401(k) plan, or they roll the assets over to another retirement saving account, such as a new 401(k) or an Individual Retirement Account. Most of those who do withdraw assets have very small accumulated balances. By comparison, the expense ratio charged by the financial institutions administering 401(k) accounts has a larger effect on retirement resources than the possibility of pre-retirement withdrawal.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7314.

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Date of creation: Aug 1999
Publication status: published as Preretirement Cashouts and Foregone Retirement Saving: Implications for 401(k) Asset Accumulation , James M. Poterba, Steven F. Venti. in Themes in the Economics of Aging , Wise. 2001
Handle: RePEc:nbr:nberwo:7314
Note: AG PE
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  1. James M. Poterba & Steven F. Venti & David A. Wise, 1999. "Implications of Rising Personal Retirement Saving," NBER Working Papers 6295, National Bureau of Economic Research, Inc.
  2. Chang, Angela E., 1996. "Tax Policy, Lump-Sum Pension Distributions, and Household Saving," National Tax Journal, National Tax Association, vol. 49(2), pages 235-49, June.
  3. David Neumark & Daniel Polsky & Daniel Hansen, 1997. "Has Job Stability Declined Yet? New Evidence for the 1990's," NBER Working Papers 6330, National Bureau of Economic Research, Inc.
  4. Sabelhaus, John & Weiner, David, 1999. "Disposition of Lump-Sum Pension Distributions: Evidence from Tax Returns," National Tax Journal, National Tax Association, vol. 52(n. 3), pages 593-614, September.
  5. Chang, Angela E., 1996. "Tax Policy, Lump-Sum Pension Distributions, and Household Saving," National Tax Journal, National Tax Association, vol. 49(2), pages 235-249, June.
  6. David A. Wise, 1998. "Introduction to "Frontiers in the Economics of Aging"," NBER Chapters, in: Frontiers in the Economics of Aging, pages 1-20 National Bureau of Economic Research, Inc.
  7. James M. Poterba & Steven F. Venti & David A. Wise, 1995. "Lump-Sum Distributions from Retirement Saving Plans: Receipt and Utilization," NBER Working Papers 5298, National Bureau of Economic Research, Inc.
  8. Alan L. Gustman & Thomas L. Steinmeier, 1995. "Pension Incentives and Job Mobility," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number pijm, November.
  9. William F. Bassett & Michael J. Fleming & Anthony P. Rodrigues, 1998. "How workers use 401(k) plans: the participation, contribution, and withdrawal decisions," Staff Reports 38, Federal Reserve Bank of New York.
  10. Bassett, William F. & Fleming, Michael J. & Rodrigues, Anthony P., 1998. "How Workers Use 401(k) Plans: The Participation, Contribution, and Withdrawal Decisions," National Tax Journal, National Tax Association, vol. 51(n. 2), pages 263-89, June.
  11. David A. Wise, 1998. "Frontiers in the Economics of Aging," NBER Books, National Bureau of Economic Research, Inc, number wise98-1.
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