Hearts & Wallets’ Portrait of U.S. Household Finances Reveals Prolonged Negative Impact on Retirees

Older Americans Working Longer, Reducing Income Drawn from Assets

(Hingham, MA) – The annual snapshot of U.S. household finances by retirement and savings research firm Hearts & Wallets reveals a prolonged negative impact on retirees as a result of low interest rates.

“Retirees are working longer and reducing income drawn from assets because of very low interest rates resulting from ongoing government policy and uncertain equity markets,” said Chris Brown, Hearts & Wallets principal. “These factors impact the retirement income market. We’ve revised our 2020 projections downward as a result. The biggest concern is not the size of the market, but the unfortunate impact on millions of retiree households. Sadly, those getting hit worst are the middle and lower middle wealth groups. Our investor behavior data show middle class groups tend to take no income at all or dip into capital in an unsustainable fashion. This is an absolutely tragic and undeserved end to a lifetime of saving, and a terrible example for future generations.”

The “Portrait of U.S. Household Wealth: Market Sizing, Segmentation and Product Ownership by Age, Assets, Lifestage and Behavioral Segment” analysis taps into multiple government data sources and layers on new, proprietary quantitative 2012 data from more than 5,400 U.S. households and ongoing qualitative research to provide the most comprehensive and up-to-date look at the state of American investor finances. The study also serves as a toolkit for customized market sizing information for Hearts & Wallets’ clients.

New Definition of Retirement Income Market?

“With interest rates at unprecedented lows and political pressure to keep them low or lower further, some firms may want to change the definition of the retirement income market as assets being used to draw four percent or more of income to three percent or more. The sad reality is that with the long-term policies that appear to be currently set in place, savers will be left unrewarded for years to come,” said Laura Varas, Hearts & Wallets partner.

Hearts & Wallets projects a retirement income market in 2020 of between 14 to 24 percent of all U.S. household investable assets, lower than the 20 to 30 percent projections made last year.

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“Although we observed a decrease in 2010, we waited to reduce 2020 estimates until this year,”  Brown said. “We had seen signs in our 2010 quantitative study but in 2012, we became certain more older people are preferring to work longer and reduce income drawn from assets. This was demonstrated through quantitative data in combination with attitudinal shifts in our Explore focus groups. Low interest rates may be the biggest reason households do not cross the four percent income draw down threshold, as Americans cut back on spending and make do with less instead of liquidating investments.”

The projection is based on the behavior of retirees without pensions. In 2012, 45 percent of non-pensioner assets are being drawn for income at four percent or more, down from the 50 to 60 percent rate in 2006 and 2008.

Poorer Households More Affected

Less affluent households, which seem to be generating virtually no income or taking unsustained income, may be more affected. Wealthier households are more successful at taking moderate income. For households with $100,000 to $250,000, 35 percent of assets generate virtually nothing, and 20 percent are withdrawing an unsustainable nine percent or more in income. Only 21 percent of wealthier households generate almost no income, and very few take more than seven percent.

“Overall, there is little reward for frugal households to save in this climate,” said Varas. ”We are extremely troubled at this message this sends to younger generations, who are actually more interested in saving, and trying to adapt their behavior to save more.”

The Hearts & Wallets Portrait analysis is based primarily on publically available government sources, compared to the most recent Federal Reserve Survey of Consumer Finance (2007, completed in March 2008, released 2009; first re-interview ever in progress as of August 2011) and quarterly Flow of Funds, and translates the findings into understandable terms.

Total U.S. household investable assets grew from $30.2 trillion at year-end 2010 to $31.9 trillion with retirement assets up slightly from $10.7 trillion to $10.9 trillion and taxable assets up to $21.0 trillion from $19.5 trillion. Taxable asset growth, by seven-year CAGR, outpaced retirement at 6.1 percent versus 4.8 percent. Overall U.S. households declined to 118 million, or about 2 percent from 120 million in 2010. A drop in younger households accounted for most of the overall decline, as younger individuals presumably moved back with parents or in with roommates.

IRAs remained the largest of all categories of retirement assets as $4.9 trillion. Private DC was steady at $3.9 trillion. In 2011, the seven-year CAGR of IRAs was 5.6 percent, outpacing all other retirement asset types, but the growth rate slowed from 2010 to 2011.

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For complete data on the Portrait study of U.S. household wealth, including investor target market by age and assets, contact Hearts & Wallets.

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