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Dispatches Retired Investor

How Retirees Handle Portfolio Allocation, Income and Spending

Three trends regarding the actions that a majority of pre-retirees and new retirees take with their portfolios were found.

by Matthew Bajkowski | October 2021

Three trends regarding the actions that a majority of pre-retirees and new retirees take with their portfolios were found.

Drawing on 401(k) and IRA data from the Employee Benefit Research Institute (EBRI) and client households of JPMorgan Chase & Co., JPMorgan Asset Management studied the actual behavior of 31,000 people as they approached and entered retirement between 2013 and 2018.

One, 75% of retirees reduced their investment risk after rolling 401(k) funds into IRAs, decreasing the equity portion of their asset allocation on a median basis by 17%. The greater an equity allocation was in the 401(k) before the rollover, the greater the adjustment made out of equities. Those who made the adjustment at an inopportune time locked in market losses for the entirety of their retirement.

Two, required minimum distributions (RMDs) were the primary guideline in determining withdrawal rates from IRAs, regardless of income needs. Retirees with less observed wealth were more likely to make withdrawals only upon reaching the age for RMDs. Overall, 80% of retirees below the RMD age didn’t begin withdrawals when entering retirement.

The study noted that relying on RMDs did not generate enough income for retirees in the early years of their retirement when spending is higher. As a result, a sizable balance was often left over as retirees aged and their spending declined. The report’s authors argue that basing withdrawals on retirement goals, time horizon and risk tolerance rather than RMDs would give retirees the greatest utility from their funds.

Three, income and spending were highly correlative: The more regular income retirees had, the more they spent. This trend applied to all retiree income streams, including Social Security benefits, RMDs and annuities or pensions, for those who had them.

Considering the report’s takeaways, the authors recommend prudent, proactive portfolio management with more risk and a flexible, dynamic approach to withdrawals based on actual spending needs.

Of the retirees studied, about 30% had an annuity or a pension, most began to receive their Social Security benefits at age 66 and most retired between ages 65 and 70. The median known retirement wealth was about $110,000 and the median estimated investible wealth, based on Equifax data, was $300,000 to $350,000.

Source: “Mystery No More: Portfolio Allocation, Income and Spending in Retirement,” by Katherine Roy and Kelly Hahn; JPMorgan Asset Management, August 2021.

Discussion

JOHN G from MI posted over 4 years ago:

It's always interesting to compare yourself to others in the same boat. One thing I am unclear on is what is the difference in median known retirement wealth vs median estimated investible wealth? Why are they different by such a large amount? If I were asked the question I would think my known retirement wealth would be all of my monies, and my investible wealth would be a lower number based on what I want to invest and what I have in home, cash, etc that wouldn't be invested.


David E from MD posted over 4 years ago:

I agree that the terms are confusing, especially retirement wealth. Neither number is as high as one would like.


JEAN H from IL posted over 4 years ago:

Median observable wealth is based on 401(k) and IRA accounts that were in J.P. Morgan’s and Employee Benefit Research Institute’s joint database. Median estimated investable wealth was based on data from IXI/Equifax, Inc. and includes assets not in the other database.


ROBERT A from NC posted over 4 years ago:

I wonder how many of those who "reduced their investment risk" by selling equities and buying bonds feel about their decision now. The article states, "Those who made the adjustment at an inopportune time locked in market losses for the entirety of their retirement." I'd modify that to say that those who made the adjustment at any time missed out on significant gains in exchange for the meager returns from bonds. Bonds are not "safe."


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