UpFront | Published in September 2016

Affluent Retirees Hold Onto Their Accounts

The research suggests that the discussion needs to shift to spending rather than withdrawal rates

By PLANSPONSOR staff | September 2016
Art by James Yang
Retirees’ withdrawal rates from their financial accounts are modest, and their spending even more so, research from Vanguard finds. Among affluent retirees owning financial accounts, the median withdrawal rate was 3%, and the median spending rate was 1%.
Vanguard focused on 10 types of financial accounts in its study: individual retirement accounts (IRAs), employer-sponsored defined contribution (DC) plan accounts, annuities with a balance, cash-value life insurance, mutual fund accounts, brokerage accounts, money market accounts, certificates of deposit (CDs), and bank savings and checking accounts.
“What we showed is that even though people are getting these withdrawals, they’re not spending them all. People are not spending down from financial accounts in retirement; they are saving them to grow,” says Steve Utkus, principal and director of Vanguard Center for Retirement Research, in Malvern, Pennsylvania.
Utkus says when Vanguard first started its research, it assumed, as many financial planners do, that retirees would consider all the assets in their accounts to be in play and plan to draw down from the entirety. However, the research found that four cornerstone accounts—DC plans, IRAs, mutual funds and brokerage accounts—are core financial accounts that retirees view as long-term holdings. Most liquid accounts—bank checking and savings and money market accounts—have higher spending rates compared with the other types of financial accounts.
Utkus says there is much debate about what is a sustainable withdrawal rate in retirement. “Some say it’s the classic 4% rule, but others, such as Vanguard, say retirees can start that way but adjust the percentage based on market performance.” However, the research suggests that the discussion needs to shift to spending rather than withdrawal rates from financial accounts in order to effectively measure the sustainability of savings in retirement.
According to Utkus, the reason Vanguard specifically analyzed affluent retirees is it wanted to get a picture of people who are trying to create a regular income stream.