Data & Research

ICI Says Retirees Responsible with Distributions

Retirees do not spend their defined contribution (DC) balances immediately at retirement, but make thoughtful choices and use the proceeds prudently, according to a new study by the Investment Company Institute (ICI).
Reported by Rebecca Moore

The study, based on a 2007 survey of more than 600 recent retirees, found only about 3% of accumulated DC account assets were spent immediately at retirement, a press release said. The few retirees who spent their entire DC plan lump sums generally had received small distributions and, on average, derived a sizable portion of their household incomes from a defined benefit (DB) plan and Social Security payments. Of those who spent their entire lump sum, most used the proceeds sensibly, for example, to buy a primary residence, make home repairs, repay debt, or pay for health care, ICI said.

For the most part, retirees were guided by professional financial advisers. The survey found that when DC plan participants had more than one option for their plan balances, they typically consulted multiple sources of information, appeared to have carefully considered their options, and generally selected a mode of distribution consistent with their personal financial circumstances.

More than half of DC plan participants in the study received their distribution as a lump sum. Of those, 86% reinvested all or some of the proceeds, usually by rolling over to Individual Retirement Accounts, and 62% reinvested the entire amount. The greater the value of the lump-sum distribution, the more likely recipients were to reinvest the proceeds.

Other study findings, according to the press release, include:

  • Retirees with sizable household financial assets and income typically postponed use of their plan balances, either by reinvesting the assets in IRAs or deferring their distributions.
  • Retirees seeking a steady income stream typically annuitized plan assets. Retirees with strong needs for current income started to withdraw their balances in installment payments.
  • Large account balances were much more likely to be distributed through annuities or as lump sums that are rolled over into other investments.

The study is based on a survey in late 2007 of more than 600 primary or co-decisionmakers for household saving and investing who retired between 2002 and the time the survey began.

The survey report is here.