Many families arrive at retirement with a wide range of assets — homes, vehicles, bank accounts, retirement savings accounts, investments and, sometimes, even small businesses or other real estate.

New research is showing how people make changes to their portfolios of assets as they grow older and what happens if they experience health setbacks. The research also raises some warning signals about the future financial security of some groups of older people.

Widows, for instance, put more assets into bank accounts and certificates of deposit when they experience physical or mental difficulties, reports a study by the Center for Retirement Research at Boston College in Newton, Mass. These findings imply liquidity or ease of portfolio management may be more important to these households than high returns.

“While one might expect widows to put the proceeds of home and vehicle sales into such accounts on a temporary basis, before reinvesting the funds elsewhere, it appears this choice may, in fact, represent a permanent shift into these low-risk, low-return assets,” says the report on the study, co-authored by Courtney Coile, assistant professor of economics at Wellesley College, who is a research associate at the Center for Retirement Research, and Kevin Milligan, assistant professor of economics at the University of British Columbia in Vancouver.

“With households facing growing responsibilities to manage assets during retirement, portfolio decisions like these may have important implications for the wellbeing of vulnerable groups, such as elderly widows,” says the report.

The study used data covering the 10 years from 1992 to 2002, collected in a U.S. health and retirement survey of older Americans conducted by the University of Michigan for the National Institute on Aging. Survey participants are re-interviewed every other year, allowing the households to be followed over time.

The Coile/Milligan report says the ability of households to manage their assets in retirement is becoming more important because the shift toward defined-contribution pension plans means that households will probably receive their pensions as a stock of assets at retirement rather than as a flow of monthly benefits. Older households, the report says, hold a sizable share of total U.S. household net worth, “so the spend-down patterns of these households may affect asset markets, particularly as the large baby-boom cohort enters retirement.”

Coile and Milligan say their study suggests factors other than standard risk-and-return considerations weigh heavily in the portfolio decisions of many older households. Changes in asset holdings occur as people age, they say, with the most significant being the sale of homes and vehicles that commonly occur after age 75, and an increase in the amount of assets in bank accounts and certificates of deposit.

Health setbacks play a major role in decisions to sell homes and vehicles, the report adds, either because the household can no longer manage or use them, or because the household needs to tap into those resources because of financial need.

Health shocks — which can be anything from widowhood to new chronic illnesses or acute events — tend to affect household portfolios in the same way as aging, the report says. The effect of widowhood on home and vehicle ownership, for instance, is similar to the effect of being a decade or more older.

The Coile/Milligan report also points out that, in the case of ownership of businesses and real estate other than the home, the effects of chronic and acute health shocks are similar to or even greater than the effect of widowhood.

The study found the majority of households headed by people aged 60 to 64 own a principal residence, one or more vehicles and have a bank account. On average, home equity accounts for half of total household assets, with the typical household having home equity of about US$120,000 (see table, above).

The study found many households have IRAs (similar to Canada’s RRSPs) or own stocks. Few own certificates of deposit, small businesses or other real estate, but for those who do, the value of these assets can be significant. For instance, the typical business is valued at roughly US$153,000. All told, the typical household in this age group has assets of about US$170,000.

The report noted that people in wealthier households tend to live longer; also, people experience life events differently, depending on where they were born.

@page_break@In Canada, a new wealth survey found the median net worth of elderly Canadian families in 2005 was $443,600 — more than double the $204,000 median net worth of non-elderly Canadian families. The survey, recently released by Statistics Canada, shows elderly families had the highest net worth of any type of family in 2005.

StatsCan notes, however, that this is because many elderly families live in mortgage-free homes and the value of their accumulated pension wealth is higher. “This should not be interpreted to mean that all elderly families have relatively high net worth,” the agency cautions. IE