Finance and Economics Discussion Series

A New Look at the Wealth Adequacy of Older U.S. Households

David A. Love, Paul A. Smith, and Lucy C. McNair
2008-20

Abstract: We construct two measures of the current wealth adequacy of older U.S. households using the 1998--2006 waves of the Health and Retirement Study (HRS). The first is the ratio of "comprehensive wealth"--defined as net worth plus the expected value of future income streams--to the wealth that would be needed to generate expected poverty-line income in future years. By this measure, we find that the median older U.S. household is reasonably well situated, with a "poverty ratio" of about 3.9 in 2006. However, we find that about 18 percent of households have less wealth than would be needed to generate 150 percent of poverty-line income over their expected future lifetimes. Our second measure is the ratio of the annuitized value of comprehensive resources to pre-retirement earnings. This measure identifies a median "replacement rate" of about 105 percent, with about 13 percent of households experiencing replacement rates of less than 50 percent. Comparing the leading edge of the baby boomers in 2006 to households of the same age in 1998, we find that the baby boomers show slightly less wealth, in real terms, than their elders did, and single boomers show a bit higher incidence of "inadequacy" than did their elders. Nonetheless, the median single boomer appears to have adequate resources. Moreover, we find a rising age profile of annualized wealth, even within households over time and after controlling for other factors, suggesting that older households are not spending their wealth as quickly as their survival probabilities are falling.

Keywords: Wealth, saving, adequacy, poverty, retirement