Retirees aren't nearly as bad with their retirement spending as we've been led to believe, according to a recent Investment Company Institute study. In fact, their spending could be considered downright responsible. Whether this will translate to the boomer generation remains to be seen. Among the key findings:
Only a small fraction of retirees can be characterized as having immediately spent the proceeds of their defined contribution plans.
Moreover, the fraction of accumulated balances spent at retirement was even smaller--almost negligible--because the larger the account balance, the more unlikely it was to be spent quickly. Only about 3 percent of accumulated defined contribution account assets were spent immediately at retirement.
When DC plan participants have more than one option for the disposition of their plan balances at retirement, they generally make thoughtful decisions.
Surveyed retirees typically consulted multiple sources of information, appeared to have considered carefully the distribution options available for withdrawing and using their assets and, generally, selected distribution options consistent with their personal financial circumstances.
Retirees with sizable household financial assets and income typically postponed use of their plan balances either by reinvesting the assets in Individual Retirement Accounts or deferring their distributions.
Most lump-sum recipients immediately rolled the funds into an IRA or other investment. Retirees who deferred their distribution had the highest levels of financial assets.
Retirees who received their distribution through either annuity or installment payments expressed a desire for regular income as their primary motivation.
In contrast, retirees who received a lump sum or deferred their distribution answered that they did not need the money at the time of retirement, or indirectly expressed the same sentiment by indicating they wanted to roll the balance into an IRA.
The majority of retirees who received lump-sum distributions acted prudently with the assets.
More than half of retiring DC plan participants received their distribution as a lump sum. For the most part, retirees were guided by professional financial advisers and reinvested all their proceeds in IRAs. Their IRA portfolios typically were well-diversified, with the largest percentage of assets, on average, allocated to equities. Even lump-sum distribution recipients who did not reinvest all of their plan proceeds typically reinvested the majority of the distribution.
The few retirees who spent their entire DC plan lump sums generally had received small distributions.
In many instances, these recipients used the proceeds prudently, for example, to buy a primary residence, to repay debt, to pay for healthcare, or to make home repairs. On average, these retirees derived a sizable portion of their household incomes from defined benefit (DB) plan and Social Security payments.
