There’s a conventional wisdom when it comes to retirement income. Individuals work and save in the accumulation stage. And once they reach retirement, they begin to draw down and spend their savings. The other conventional wisdom is that traditional monthly pensions have a limited role, and it’s all about managing and drawing down from 401(k) savings in retirement.

But conventional wisdom is often too simplistic or even wrong. To obtain a clearer picture of retirees’ financial situation, my colleagues and I studied the retirement income of retiree households. We focused on households with at least $100,000 in savings of any kind—the types of households who might need to draw down from financial accounts in retirement.¹ We hoped the study would provide a realistic view of current and future retirees’ income needs, at least in this more affluent segment. The results didn’t perfectly align with conventional wisdom. Here are three key points from our findings:

Retirement income is varied and complex

When thinking about the shift from traditional defined benefit (DB) pensions to defined contribution (DC) accounts, conventional wisdom is that today’s retirement incomes include some Social Security, perhaps a small pension, and a meaningful  DC plan balance. But in our research, we identified eight different groups of retiree households, each with varying types and levels of wealth. The profile I described is just one of them. The groups range from those relying primarily on wealth from guaranteed income sources (e.g., Social Security or pensions) to those with predominant wealth holdings in financial assets (e.g., IRAs, 401(k)s, mutual funds, or brokerage accounts). How they manage their assets may vary. While the latter group may need to tap their savings and get help with income strategies immediately upon retirement, the other segment may afford to keep an accumulation mindset and continue investing for growth.

Retirement income investor groups

Source: Vanguard, 2014.

Retirement income still includes pensions

In spite of the much-discussed DB to DC shift and the eventual disappearance of pensions, we found that a significant share of current affluent retirees still have pensions.² Out of the eight groups of retiree households identified, one group representing one-quarter of retirees rely primarily on pension income. If you include those relying largely on Social Security, half of retirees still depend mostly on guaranteed income. So, income-generating strategies for financial accounts, including systematic drawdown or annuitization, aren’t priorities for a significant group of retirees, whereas for others they’re an immediate concern.   

Retirees are spending and saving

Contrary to conventional wisdom, we found that retirees’ saving behavior continued into retirement. On average, retirees spent 69% of their income from all sources but saved 31%. This level of saving may partly be due to our affluent sample, so we need to be careful about applying this finding to the wider retiree population. But the finding that retirees, regardless of wealth, do manage to save some income is in line with broader academic studies. We can speculate on the reasons, which are likely to include worries about future expenses, particularly health care, and a desire to leave a bequest to family members, charities, or others.

What does all of this mean for retirees and preretirees? First, retirement income planning requires different solutions and tax considerations, depending on how various households have accumulated their savings. The variety and complexity in retiree holdings require that income advice be tailored to the specific mix of holdings, as well as to varying goals and risk preferences. Furthermore, retirement advice will not only need to focus on generating income, but also on the proposed use of that income in terms of spending and saving.

¹Our survey sample likely encompasses a population between 24% and 35% of households ages 60 to 75 in the United States.

²See my colleague’s blog on how the DB to DC transition will be slow.


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