Retirement-Age Households Show a ‘Chunk or Nothing’ Withdrawal Pattern

As the large Baby Boomer generation nears and enters retirement, more retirement plan sponsors have been thinking about how they can facilitate the drawdown phase for participants.

The retirement income market—defined as assets controlled by households age 65-plus with $100,000 to less than $5 million who take 4% or more of personal assets as income—is currently 8% of U.S. household assets, up from 4% of assets in 2006. Based on incidence of pensions and behaviors of retirees, regardless of pension status, data and consulting firm Hearts & Wallets estimates this market will grow to encompass 11% to 12% of assets in 2029.

Observing drawdown patterns can inform plan sponsors about how to design their plans to facilitate withdrawals and can inform sponsors and advisers about what guidance participants need. Defined contribution (DC) plan participants are unlikely to feel confident about retiring when they receive no retirement income projections and no help defining discretionary versus required expenses.

Consumer behavior shows a consistent “chunk or nothing” pattern in retirement, first identified by Hearts & Wallets in 2012, where nearly half (43%) of households age 65 and older draw either nothing (0% of assets) or chunks (8% or more of assets). Looking at 2013, 2015 and 2019, Hearts & Wallets found that more than one-third of households that make $100,000 to $250,000 took 0.0% to 0.9% of assets, while between 20% and 24% took 9% or more of assets as income. Approximately three in 10 households making between $250,000 and $500,000 took 0.0% to 0.9% of assets and between 13% and 20% took 9% or more. However, wealthier households—with $500,000 to less than $5 million in investable assets—do not follow the chunk or nothing pattern.

The once-espoused 4% rule has fallen out of favor, with some saying that is not an appropriate withdrawal amount for everyone depending on individual circumstances and some saying that with the forecasted lower return environment, 4% is just too much. Looking at 2013, 2015 and 2019, Hearts & Wallets data shows that among households age 65 and older with $100,000 to less than $5 million in investable assets, the majority withdrew less than 5% from their accounts—with the percentage of those doing so decreasing as the amount of investable assets increased.

Still, in 2019, 21% of households making $100,000 to $250,000 withdrew 4% or more as income. Twenty-eight percent of households making $250,000 up to $500,000 withdrew 4% or more.

However, Hearts & Wallets found the behavior of drawing 4% or more is cyclical with distress in the economy, as shown by a spike in 2008, which then reverted to the secular growth path. In 2006, among households age 65 and older with $100,000 to less than $5 million in investable assets, 20% withdrew 4% or more; this jumped to 48% in 2008. Since then, the number of households withdrawing 4% or more has hovered around one-third. Hearts & Wallets projects this will spike to 50% in 2021.

“Income-taking advice needs to be enhanced and include advice on which accounts to tap,” said Amber Katris, Hearts & Wallets subject matter expert and co-author of the report. “Not only is the retirement income market now substantial, but also many consumers need to generate cash during COVID-19. During times of reduced income, similar needs exist for retirement income and short-term cash, both of which involve sustaining spending. Households impacted by COVID-19 may also need solutions that include short-term debt.”