According to a recent study by the National Bureau for Economic Research, 46.1 percent of retirees die with a net worth of less than $10,000.
There are two ways to achieve this outcome. The first is for those with a comfortable level of wealth in retirement. Wealth does an individual no good after he or she is dead, and some people would feel content with distributing their wealth in their last few years. The second path is more common in the study’s findings. Most people simply have a low level of wealth going into retirement, and with a lack of strong income-generating opportunities, wealth continues at the same level or is further depleted.
That isn’t to say that everyone who dies with less than $10,000 to their names are struggling during retirement. Social securities, pensions, and proceeds from retirement savings can cover living expenses, and as one ages, there is less of a need to save for long-term personal goals. A low level of savings puts one at danger for financial trouble in the event of an emergency, however, and certain types of emergencies, like medical bills, might be more common past a certain age.
Retirees without families to pass on inheritances might not see any purpose to dying with wealth, and would therefore endeavor to give much of it away. From a tax perspective, it might be better to donate a significant amount to charity before death, taking advantage of an income tax break in addition to a reduction of the value of the estate, than to bequest the same amount. That depends on earning enough income during retirement for the tax break to have an effect, and it requires having enough assets in the estate for a reduction in value to make a tax difference. Estate taxes always seem to be in flux, but in 2012, the first $5,125,000 in an estate is exempt from tax.
And that’s not the retiree this study is referring to. The study is focusing on those with $10,000 or less, ruling out this particular path of reducing wealth — perhaps. It doesn’t rule out the possibility, however, of individuals, perhaps those who are comfortable but do not consider themselves wealthy, spending down or giving away their wealth in order to avoid the rest of the world’s hassles with dealing with an estate.
Perhaps an indicator that most of the study participants are in fact not in this category — that those dying with $10,000 or less in net worth are those who did not have wealth and choose to give it away in their last days, weeks, months or years — is the finding that health is the poorest among these individuals. Conversely, wealth at the end of retirement has high correlations to other aspects of living. Those with higher levels of net worth live longer. That should be strong enough motivation to build wealth throughout one’s lifetime.
People who were never married have a higher probability of dying with less than $10,000. The same is true for those who are divorced. The study doesn’t claim there is a cause and effect relationships between marriage and wealth, but the correlation is important. The same factors might produce both results — such as a confident personality.
The study goes on to evaluate retirees at death based on three pathways. One-person households are identified as those who were never married, two-person to one-person households are retirees whose spouse had previous died, and two-person households are those where the spouse survives past the person in the study. The results show that the spouse who dies first generally dies with more wealth and better health, and for the surviving spouse, income, wealth, and health drop off quickly.
While this new study looks at wealth at the end of retirement (that is, death), most prior studies evaluated a retiree’s wealth at the beginning of this period. There’s a good reason for the ex ante analysis. A retiree’s financial condition at the onset of retirement, the choices made based on that condition, and the situations that affect that starting position determine how one lives one’s life in retirement.
The ex post analysis, where the quality of life in retirement is determined by the final outcome — wealth at the time of death — doesn’t reveal as much without context that reveals more information about the path to $10,000 or less. That isn’t to say the study isn’t relevant or interesting; it is, if just by virtue of being a different way to look at the overall picture of retirement in the United States.
There may be a few things to take away from this study pertaining to the correlation between wealth at the end of retirement and quality of life, but it also reminds me of my core philosophy of building wealth. A high net worth is not a real goal. Money is meaningless in life except for what it can be used for. Accumulating wealth is important so you have a better chance of meeting real life goals without interference.
People, but not everyone, whom I’ve asked about their personal life goals have said to me that their primary purpose in life is to die with $1 million (or $10 million, or $100 million). This isn’t a line of thinking that I would recomment. Sure, you can do a lot of good with a large sum of money in your estate, if that money goes to worthy causes or even to your relatives, but those activities — what you do with the money, not the collection of the money itself — should be defined as goals.
What this study says to me is that there are not enough people making lofty goals that require money, perhaps focusing on nothing more than the comfortability of their own selves and families, that they are unfortunately not reaching their goals, or, possibly in a few cases, are reaching their goals and no longer see a need for the accumulation of wealth.
Updated September 3, 2012 and originally published August 29, 2012.