Savings Needed for Health Expenses for People Eligible for Medicare: Some Rare Good News, p. 2 IRA Asset Allocation, 2010, p. 8

Transcription

1 October 2012 Vol. 33, No. 10 Savings Needed for Health Expenses for People Eligible for Medicare: Some Rare Good News, p. 2 IRA Asset Allocation, 2010, p. 8 A T A G L A N C E Savings Needed for Health Expenses for People Eligible for Medicare: Some Rare Good News, by Paul Fronstin, Ph.D., Dallas Salisbury, and Jack VanDerhei, Ph.D., EBRI Medicare generally covers only about 60 percent of the cost of health care services (not including long-term care) for Medicare beneficiaries ages 65 and older, while out-of-pocket spending accounts for 13 percent. The Patient Protection and Affordable Care Act (PPACA) reduces cost sharing in the Part D donut hole down to 25 percent by This year-to-year reduction in coinsurance will continue to reduce savings needed for health care expenses in retirement, all else equal, for individuals with the highest prescription drug use. EBRI analysis finds 1 2 percent reductions in needed savings among individuals with median drug use and 4-5 percent reductions in needed savings among individuals at the 90th percentile in drug use since EBRI s 2011 analysis. A 65-year-old man would need $70,000 in savings and a woman would need $93,000 in 2012 if each had a goal of having a 50 percent chance of having enough money saved to cover health care expenses (excluding longterm care) in retirement. A 65-year-old couple, both with median drug expenses, would need $163,000 in 2012 to have a 50 percent chance of having enough money to cover health care expenses (excluding long-term care) in retirement, $227,000 to have a 75 percent chance of covering those expenses, and $283,000 to have a 90 percent chance of doing so. These estimates are 1 2 percent lower than the savings targets estimated in IRA Asset Allocation, 2010, by Craig Copeland, Ph.D., EBRI The EBRI IRA Database is an ongoing project of the Employee Benefit Research Institute that currently contains information on million accounts of 11.1 million unique individuals with total assets of $1.002 trillion, as of year-end Analysis of the EBRI IRA Database finds that about half of all individual retirement account (IRA) assets are allocated to equities, although this varied with age, account balance, and IRA type. Those older, having higher account balances, or owning a traditional-rollover IRA had, on average, lower allocations to equities. Roth IRA owners were much more likely to have 90 percent or more of their account invested in equities than owners of the other types. Above age 35, the likelihood that an IRA owner has more than 90 percent in equities decreases. IRA owners with higher account balances were less likely to have extreme asset allocations. A monthly newsletter from the EBRI Education and Research Fund 2012 Employee Benefit Research Institute

2 Savings Needed for Health Expenses for People Eligible for Medicare: Some Rare Good News By Paul Fronstin, Ph.D., Dallas Salisbury, and Jack VanDerhei, Ph.D., Employee Benefit Research Institute Introduction When it was established in 1965, Medicare (the federal, health-care-insurance program for the elderly and disabled) was not designed to cover health care expenses in full. Even in 2003, when the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) added outpatient prescription drugs as an optional benefit, the program included a then-controversial feature known as the coverage gap, or so-called donut hole. The Donut Hole The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) added outpatient prescription drugs as an optional benefit. When the program was originally enacted, it included a controversial feature: a coverage gap, more commonly known as the donut hole. The Patient Protection and Affordable Care Act of 2010 (PPACA) included provisions to reduce (but not eliminate) this coverage gap. By 2020, enrollees will pay 25 percent of the cost of prescription drugs for both generic and brand-name drugs that are in the coverage gap. In 2009, Medicare covered 59 percent of the cost of health care services for Medicare beneficiaries age 65 and older, while out-of-pocket spending accounted for 13 percent, and private insurance covered 14 percent (Figure 1). In the future, individuals can expect to pay a greater share of their costs out of pocket because of the combination of the underfunded financial condition of the Medicare program and cutbacks to employment-based retiree health programs (Fronstin and Adams 2012). This report updates previous estimates by the Employee Benefit Research Institute (EBRI) on savings needed to cover health insurance premiums and health care expenses in retirement (Fronstin, Salisbury, and VanDerhei 2011). Unlike past reports, it finds that the savings targets for a 65-year-old retiring in 2012 are not higher than the savings target for a 65-year-old in the previous year. In fact, in some cases, savings targets have fallen by 5 percent. This report discusses the EBRI model, the savings targets, and reasons for the decline. Modeling Technique Determining how much money an individual or couple needs in retirement to cover health care expenses is complicated. Among other factors, it depends on the age at which he or she retires; length of life after retirement; the availability and source of health insurance coverage after retirement to supplement Medicare; health status; outof-pocket expenses; the rate at which health care costs increase; and interest rates and other rates of return on investments. In addition, public policy that changes any of the above factors will also affect spending on health care in retirement. While it is possible to come up with a single number that individuals can use to set retirement-savings goals, a single number based on averages will be wrong for the vast majority of the population. This analysis uses a Monte Carlo simulation model 1 to estimate the amount of savings needed to cover health insurance premiums and out-of-pocket health care expenses in retirement. Estimates are presented for people who supplement Medicare with a combination of individual health insurance through Plan F Medigap coverage and Medicare Part D for outpatient-prescription-drug coverage. For each source of supplemental coverage, the model simulates 100,000 observations allowing for the uncertainty related to individual mortality and rates of return on assets in retirement, 2 and computes the present value of the savings needed to cover health insurance premiums and ebri.org Notes October 2012 Vol. 33, No. 10 2

3 out-of-pocket expenses in retirement at age 65. These observations are used to determine asset targets for having adequate savings to cover retiree health costs 50 percent, 75 percent, and 90 percent of the time. Estimates are also jointly presented for a stylized couple, both of whom are assumed to retire simultaneously at age 65. Savings Targets to Cover Health Insurance Premiums and Out-of-Pocket Costs in Retirement Figure 2 contains the savings estimates for a person age 65 in 2012 who purchases Medigap Plan F and Medicare Part D outpatient drug benefits to supplement Medicare. As discussed above, there will be uncertainty related to a number of variables, such as health care costs, longevity, and interest rates. Among people covered by Medicare Part D, there is also the uncertainty related to health status and prescription-drug use. Projections of savings needed to cover outof-pocket expenses for prescription drugs are, of course, highly dependent on the assumptions used for drug utilization. There are three sets of columns of estimates in Figure 1: one where prescription drug use is at the median (mid-point) throughout retirement, one where prescription drug use is higher (at the 75 th percentile throughout retirement), and one where prescription drug use is much higher (at the 90 th percentile throughout retirement). Under each set of columns, a comparison of the savings targets is presented for 2011 and Separate estimates are presented for men, women, and married couples. Because women have longer life expectancies than men, women will generally have larger expenses than men to cover health insurance premiums and health care expenses in retirement, regardless of the savings target. In other words, women will need greater initial savings than men even when both set the same goal for example, of having a 90 percent chance of having enough money to cover health expenses in retirement. Median Drug Expenses: According to Figure 2, a 65-year-old man would need $70,000 in savings and a woman would need $93,000 in 2012 if each had a goal of having a 50 percent chance of having enough money saved to cover health care expenses in retirement. If either instead wanted a 90 percent chance of having enough savings, $135,000 would be needed for the man, and $154,000 would be needed for the woman. A 65-year-old couple, both with median drug expenses, would need $163,000 in 2012 to have a 50 percent chance of having enough money to cover health care expenses in retirement. They would need $227,000 to have a 75 percent chance of covering their expenses, and $283,000 to have a 90 percent chance of covering those expenses. These estimates are 1 2 percent lower than the savings targets estimated in th percentile in Drug Expenses: Needed savings in 2012 for a 65-year-old man with drug expenditures at the 75 th per-centile throughout retirement would be $79,000 if he wanted a 50-percent chance of having enough savings to cover health care expenses in retirement; For a 65-year-old woman, the savings target would be $106,000 for a 50-percent chance. If either instead wanted a 90-percent chance of having enough savings, $153,000 would be needed for the man, and $176,000 would be needed for the woman. A 65-year-old couple, both with drug expenses at the 75 th percentile, would need $186,000 in 2012 to have a 50 percent chance of having enough money to cover health care expenses in retirement. They would need $258,000 to have a 75 percent chance of covering their expenses, and $321,000 to have a 90 percent chance of covering their expenses. These estimates are about 1 percent lower than the savings targets estimated in th percentile in Drug Expenses: Individuals at the 90 th percentile in drug spending at and throughout retirement experienced a 4 5 percent decline in needed savings in the simulation from 2011 to A 65-year-old man would need $102,000 in savings and a 65-year-old woman would need $132,000 in 2012 if each had a goal of having a 50 percent chance of having enough money saved to cover health care expenses in retirement. If, instead, either wanted a 90 percent chance of having enough savings, $185,000 would be needed for the man, and $210,000 would be needed for the woman. ebri.org Notes October 2012 Vol. 33, No. 10 3

4 Figure 1 Source of Payment for Incurred Health Care Expenses, Noninstitutionalized Population of Medicare Beneficiaries, Ages 65 and Older, 2009 Other Private, 3% Tricare, 2% Other, 2% Medicaid, 4% VA, 3% Private insurance, 14% Medicare, 59% Out-of-pocket, 13% Source: EBRI estimates from the 2009 Medical Expenditure Panel Survey. Figure 2 Savings Needed for Medigap Premiums, Medicare Part B Premiums, Medicare Part D Premiums, and Out-of-Pocket Drug Expenses for Retirement at Age 65 in Median Prescription Drug 75th Percentile of 90th Percentile of Chance of Having Expenses throughout Prescription Drug Expenses Prescription Drug Expenses Enough Savings Retirement throughout Retirement throughout Retirement Men 50 percent $71,000 $70,000 $80,000 $79,000 $106,000 $102, percent 107, , , , , , percent 136, , , , , ,000 Women 50 percent 95,000 93, , , , , percent 124, , , , , , percent 156, , , , , ,000 Married Couple 50 percent 166, , , , , , percent 231, , , , , , percent 287, , , , , ,000 Source: Author simulations based on assumptions described in the text. ebri.org Notes October 2012 Vol. 33, No. 10 4

5 A 65-year-old couple, who both had median drug expenses, would need $234,000 in 2012 to have a 50 percent chance of having enough money to cover health care expenses in retirement. They would need $317,000 in 2012 to have a 75 percent chance of covering their expenses, and $387,000 to have a 90 percent chance of covering their expenses. Explaining the Decline in Savings Targets Between 2011 and 2012 As mentioned above, savings targets declined between 1 percent and 5 percent between 2011 and 2012 for a person or couple age 65. For a married couple who both had drug expenses at the 90 th percentile throughout retirement and who wanted a 90 percent chance of having enough money saved for health care expenses in retirement targeted savings at age 65 fell from $407,000 in 2011 to $387,000 in The EBRI model uses projections from the Congressional Budget Office (CBO) and Centers for Medicare & Medicaid Services (CMS) for premium and health-care-cost increases in the future. The main reason for the decline in needed savings is related to slight improvements (reductions) in the projected costs of prescription drugs under Medicare Part D. CMS projected growth rates in Part D premiums, deductible levels, and other aspects of the program have fallen slightly recently. In addition, using a person age 65 in 2012 instead of in 2011 means one less year until the coverage gap in Part D phases down to 25 percent coinsurance. While the growth rate for Medicare Part B premiums increased slightly and Medigap premiums rose in 2012, these increases were more than offset by the slower projected growth in various aspects of the Medicare Part D program. Conclusion Individuals will be responsible for saving for health insurance premiums and out-of-pocket expenses in retirement for a number of reasons. Medicare generally covers only about 60 percent of the cost of health care services for Medicare beneficiaries ages 65 and older, while out-of-pocket spending accounts for 13 percent. Furthermore, the percentage of private-sector establishments offering retiree health benefits has been falling, 3 and, even where benefits are still offered, they are becoming less generous. This is true even in the public sector. This report provides estimates for savings needed to cover health insurance to supplement Medicare and out-ofpocket expenses for health care services in retirement. PPACA is reducing cost sharing in the Part D coverage gap, or so-called donut hole. By 2020, coinsurance in the coverage gap will be phased in to 25 percent. This year-to-year reduction in coinsurance will continue to reduce savings needed for health care expenses in retirement, all else equal, for individuals with the highest prescription drug use, which is why this analysis finds 1 2 percent reductions in needed savings among individuals with median drug use and 4-5 percent reductions in needed savings among individuals at the 90 th percentile in drug use. Improvements in the outlook for growth in premiums and other costs related to the Medicare Part D program also contributed to the decline in savings targets. Many individuals will need more money than the amounts cited in this report because this analysis does not factor in the savings needed to cover long-term care expenses, 4 nor does it take into account the fact that many individuals retire prior to becoming eligible for Medicare. However, some workers will need to save less than what is reported if they choose to work during retirement, thereby postponing enrollment in Medicare Parts B and D if they receive health benefits as active workers. Finally, issues surrounding retirement income security are certain to become an even greater challenge in the future as employers continue to scale back retiree health benefits and as policymakers begin to address financial shortfalls in the Medicare program with solutions that are likely to shift more responsibility for health care costs to Medicare beneficiaries. ebri.org Notes October 2012 Vol. 33, No. 10 5

6 References Employee Benefit Research Institute. Measuring and Funding Corporate Liabilities for Retiree Health Benefits. Washington, DC: Employee Benefit Research Institute, Retiree Health Benefits: What Is the Promise? Washington, DC: Employee Benefit Research Institute, Fronstin, Paul. Retiree Health Benefits: What the Changes May Mean for Future Benefits. EBRI Issue Brief, no. 175 (Employee Benefit Research Institute, July 1996).. Employee Benefits, Retirement Patterns, and Implications for Increased Work Life. EBRI Issue Brief, no. 184 (Employee Benefit Research Institute, April 1997).. Retiree Health Benefits: Trends and Outlook. EBRI Issue Brief, no. 236, (Employee Benefit Research Institute, August 2001).. The Impact of the Erosion of Retiree Health Benefits on Workers and Retirees. EBRI Issue Brief, no. 279 (Employee Benefit Research Institute, March 2005).. Savings Needed to Fund Health Insurance and Health Care Expenses in Retirement. EBRI Issue Brief, no. 295 (Employee Benefit Research Institute, July 2006).. Sources of Coverage and Characteristics of the Uninsured: Analysis of the March 2007 Current Population Survey. EBRI Issue Brief, no. 310 (Employee Benefit Research Institute, October 2007).. Scrambling for Health Insurance Coverage: Health Security for People between Years of Age. Testimony before the United States Senate Special Committee on Aging, April 3, 2008 Fronstin, Paul, and Nevin Adams. Employment-Based Retiree Health Benefits: Trends in Access and Coverage, EBRI Issue Brief, no. 376 (Employee Benefit Research Institute, October 2012). Fronstin, Paul, and Dallas Salisbury. Retiree Health Benefits: Savings Needed to Fund Health Care in Retirement. EBRI Issue Brief, no. 254 (Employee Benefit Research Institute, February 2003).. Health Care Expenses in Retirement and the Use of Health Savings Accounts. EBRI Issue Brief, no. 271 (Employee Benefit Research Institute, July 2004). Fronstin, Paul, Dallas Salisbury, and Jack VanDerhei. Savings Needed to Fund Health Insurance and Health Care Expenses in Retirement: Findings from a Simulation Model. EBRI Issue Brief, no. 317 (Employee Benefit Research Institute, May 2008).. Savings Needed to Fund Health Insurance and Health Care Expenses in Retirement: An Examination of Persons Ages 55 and 65 in EBRI Notes, Vol. 30, no. 6 (Employee Benefit Research Institute, June 2009).. Funding Savings Needed for Health Expenses for Persons Eligible for Medicare EBRI Issue Brief, no. 351 (Employee Benefit Research Institute, December 2010).. The Impact of Repealing PPACA on Savings Needed for Health Expenses for Persons Eligible for Medicare EBRI Notes, Vol. 32, no. 8 (Employee Benefit Research Institute, August 2011). Salisbury, Dallas, and Paul Fronstin. How Many Medicare Beneficiaries Will Lose Employment-Based Retiree Health Benefits if Medicare Covers Outpatient Prescription Drugs? EBRI Special Report SR-43. Washington, DC: Employee Benefit Research Institute, July 18, ebri.org Notes October 2012 Vol. 33, No. 10 6

7 VanDerhei, Jack. Measuring Retirement Income Adequacy: Calculating Realistic Income Replacement Rates. EBRI Issue Brief, no. 297 (Employee Benefit Research Institute, September 2006).. Retirement Savings Shortfalls for Today s Workers. EBRI Notes, Vol. 31, no. 10 (Employee Benefit Research Institute, October 2010). VanDerhei, Jack, and Craig Copeland. Can America Afford Tomorrow s Retirees: Results From the EBRI-ERF Retirement Security Projection Model. EBRI Issue Brief, no. 263 (Employee Benefit Research Institute, November 2003). Endnotes 1 A technique used to estimate the likely range of outcomes from a complex process by simulating the process under randomly selected conditions a large number of times. 2 Nominal, after-tax rates of return are assumed to follow a log-normal distribution with a mean of and a standard deviation of This provides a median nominal annual return of 7.32 percent. 3 See Paul Fronstin and Nevin Adams, Employment-Based Retiree Health Benefits: Trends in Access and Coverage, EBRI Issue Brief no. 377 (Employee Benefit Research Institute, October 2012). 4 See VanDerhei (2006) for estimates of the impact of long-term care expenses on the amounts needed for sufficient retirement income at the 50th, 75th, and 90th percentiles. ebri.org Notes October 2012 Vol. 33, No. 10 7

8 IRA Asset Allocation, 2010 By Craig Copeland, Ph.D., Employee Benefit Research Institute Introduction Individual retirement accounts (IRAs) are a vital component of U.S. retirement savings, representing more than 25 percent of all retirement assets in the nation. 1 A substantial portion of these IRA assets originated in other taxqualified, employment-based retirement plans, such as defined benefit (pension) and 401(k) plans, and were moved to IRAs through rollovers. Thus, IRAs in many cases are repositories for assets built up in the employment-based retirement system, as individuals hold money in them until or during retirement. Despite IRAs importance in the U.S. retirement system, there is a limited amount of knowledge about the behavior of individuals who own IRAs alone or in combination with employment-based defined contribution (DC) plans, such as 401(k)s. Consequently, expanded research in this area is needed to understand the financial prospects of future retirees and the market for IRAs. The Employee Benefit Research Institute (EBRI) has focused on retirement savings since its inception in 1978 and has done particularly informative research on the behavior of participants in 401(k) plans. 2 However, the connection between DC plan participants and IRA owners has not been as well developed. In order to fill this gap, EBRI has undertaken an initiative to study in depth this connection between DC plans and IRAs. To do this, EBRI has created the EBRI IRA Database, which links individuals, both within and across data providers, in this IRA database and with participants in DC plans. This is being done both by calendar year and longitudinally, allowing for the examination of retirement-asset holdings at a point in time and as the individual ages and either changes jobs or retires. This article is the second examination of asset allocation from the EBRI IRA Database. 3 It studies asset allocation on a dollar-weighted basis within IRA accounts by IRA type and account balance as well as by gender and account-owner age. 4 In addition to presenting the average asset allocation across the accounts, this study includes a presentation of the percentage of accounts with extreme allocations either less than 10 percent or more than 90 percent in a particular asset category. This helps illustrate the distribution of the allocations across the accounts. This research on IRA asset allocation will be built upon in future studies by examining how IRA owners with a 401(k) plan allocate their assets across those accounts, leveraging the unique ability of EBRI s databases to link individuals IRAs and 401(k) accounts. Data The EBRI IRA Database is an ongoing project that collects data from IRA plan administrators, and currently contains information on million accounts of 11.1 million unique individuals with total assets of $1.002 trillion, as of year-end The number of IRAs in the database with complete asset allocation data was lower at 10.9 million accounts with $0.859 trillion in assets. 6 EBRI is currently collecting/processing data for year-end 2011, and the database will expand significantly in the future (not Data Security The Employee Benefit Research Institute s retirement databases (the EBRI/ICI Participant- Directed Retirement Plan Database, the EBRI IRA Database, and the EBRI Integrated Defined Contribution/IRA Database) have been the subject of multiple independent security audits and have been certified to be fully compliant with the ISO Information Security Audit standard. Moreover, EBRI has obtained a legal opinion that the methodology used meets the privacy standards of the Gramm-Leach-Bliley Act. At no time has any nonpublic, personal information that is personally identifiable, such as Social Security number, been transferred to or shared with EBRI. None of the three databases allows identification of any individuals or plan sponsors. ebri.org Notes October 2012 Vol. 33, No. 10 8

9 only longitudinally but also on an annual, individual total). For each account within the database, the IRA type, the account balance, any contributions during the year, the asset allocation, and certain demographic characteristics of the account owner are included (among other items). Furthermore, the accounts can be linked by account owner to aggregate the accounts to the individual level both across and within data providers, which allows for behavioral studies at both the individual and account levels. IRA Types Within the EBRI IRA Database, IRAs are classified into four types: traditional-contributions (traditional IRAs originating from contributions, in which distributions are taxable); Roth (in which contributions are nondeductible and distributions are tax free); SEP (Simplified Employee Pension)/SIMPLE (Savings Incentive Match Plan for Employees); and traditional-rollovers (traditional IRAs originating from assets rolled over from other tax-qualified plans, such as an employment-based pension or DC plans, in which distributions are taxable). 7 The distribution of IRA accounts in 2010 was 39.2 percent in traditional-contributions; 17.7 percent traditionalrollovers (combined traditional IRAs, 56.9 percent); 20.8 percent Roth; 6.2 percent SEP/SIMPLE; and 16.1 percent unknown. 8 Asset Categories The assets in the EBRI IRA Database are divided into five categories. Equities Equity mutual funds, directly held individual stocks, and other 100-percent-equity-investment vehicles Bonds Bond mutual funds, directly held bonds, and other 100-percent-bond-investment vehicles Money Money-market mutual funds, money-market savings accounts, and certificates of deposit Balanced funds Balanced, lifestyle/lifecycle, target-date funds, and any other funds that have partial investments in both equities and bonds Other assets Any remaining assets that do not fit into the above categories, such as stable-value funds, real estate (both from investment trusts and directly purchased), fixed and variable annuities, etc. Overall Allocation In the entire EBRI IRA Database in 2010, 45.7 percent of the assets were in equities; 10.7 percent in balanced funds; 8.9 percent in money; 19.9 percent in bonds; and 14.8 percent in other assets (Figure 1). 9 When the portion of balanced funds allocated to equities was combined with the equity allocation, the total equity exposure of IRA owners was 52.1 percent. 10 Male and female IRA owners had virtually identical allocations in bonds, equities, and money. However, males were slightly more likely to have assets in the other category, while females had a higher percentage of assets in balanced funds. IRA owners under age 55 were more likely to be invested in equities and balanced funds combined than those over age 55, who were more likely than younger owners to be invested in bonds and other assets. About 8 9 percent of assets in each age group were in money funds. As the account balances increased, the percentages of assets in equities and balanced funds combined decreased, while bond and other assets shares increased. For instance, among those IRAs with balances from $10,000 $24,999, 56.7 percent of the assets were in equities and 19.6 percent in balanced funds (68.5 percent combined), compared with 45.8 percent in equities and 11.0 percent in balanced funds (52.4 percent combined) for IRAs with account balances of $150,000 $249,999. IRAs with the largest balances ($250,000 or more) had more of ebri.org Notes October 2012 Vol. 33, No. 10 9

10 the assets diversified across all the asset categories and the highest percentage of assets in bonds and other assets compared with IRAs in any of the smaller-account balance categories. Roth IRAs had the highest share of assets in equities (59.1 percent) and balanced funds (15.5 percent) (Figure 2). Traditional-rollover IRAs had the lowest percentage in equities (at 41.3 percent), but had the highest percentage of assets in money (12.8 percent) and the highest percentage in bonds. The higher allocation to equities in Roth IRAs compared with rollovers can be explained by two facts: Roth owners are younger, on average, than rollover owners, and Roth IRAs tend to be supplemental savings funded by individual contributions only, whereas rollovers tend to be the main or primary retirement savings for workers nearing retirement or retirees. Consequently, the asset allocation likely reflects owner age and the share of the retirement savings the accounts represent. Allocations Within IRA Type Gender Within each IRA type, the asset allocation differences between genders was minimal (Figure 3): The bond, equity, and money allocations were virtually identical. For example, in traditional-contribution IRAs, males had 44.5 percent of their assets in equities, while females had 44.4 percent. The one consistent difference across the three IRA types examined (traditional-contribution, traditional-rollover, and Roth) was that males had a higher share in other assets, while females had more in balanced funds. Age The asset allocation across ages within each IRA type had some minor differences, but, in general, the percentages allocated to equities and balanced funds declined as the owner became older, and the percentage allocated to bonds and other assets increased (Figure 4). Assets in Roth IRAs had the most consistent trends, with allocations to bonds, money (after age 25), and other assets increasing along with the age of the owner. The allocation to balanced funds decreased in older age groupings, whereas the allocation to equities increased in each age grouping through ages 35 44, before declining for each age grouping after that. Traditional-contributions and traditional-rollover IRAs had relatively similar patterns of asset allocation, with the younger owners (starting at ages older than 25) having lower bond allocations than those older. Allocations to balanced funds and equities decreased for accounts with older owners after age 44 for both IRA types. Account Balance Except for the smallest traditional-rollover accounts (less than $10,000) for balanced funds, the percentage of assets in balanced funds declined and bonds increased across each type of IRA as the account balance increased (Figure 5). Traditional-rollover IRAs had consistently lower equity allocations across account balances, while Roth IRAs had consistently higher allocations. Roth IRAs with balances of $250,000 or more had the highest use of other assets, representing 20 percent of the assets. Allocations by Gender Age Asset allocation between the genders across each age group was very similar (Figure 6). For instance, females and males ages had 60.9 percent and 60.8 percent, respectively, in equities, while among those ages 70 or older, women had 38.4 percent and men 39.0 percent in equities. Furthermore, a decreasing percentage of equities and an increasing percentage of bond and other assets were found as the age group increased (above age 24) for both genders. Account Balance Within each gender, the asset allocation trends across categories were very similar as the account balances increased (Figure 7). Bond and other assets allocations increased as the account balances of the IRAs increased, while the equity and balanced-funds allocations decreased as the account balances increased, and the money allocations remained relatively constant as the account balances increased, once the account balances were $10,000 or more. ebri.org Notes October 2012 Vol. 33, No

11 Figure 1 Individual Retirement Account (IRA) Asset Allocation, by Various Characteristics, 2010 Balanced Equity With Funds a Equity Balanced b Bond Money c Other All 10.7% 45.7% 52.1% 19.9% 8.9% 14.8% Gender Female Male Unknown Age Under or older Unknown Account Balance Less than $10, $10,000 $24, $25,000 $49, $50,000 $99, $100,000 $149, $150,000 $249, $250,000 or more Source: EBRI IRA Database. a Balanced funds include balanced funds, life cycle/style funds, and target date funds. b Equity With Balanced includes the equity allocation plus 60 percent of the balance fund allocation. This is for an estimation of the total percentage of assets in equities for IRA owners. c Money includes money market mutual funds and certificates of deposit (CDs). 70% Figure 2 Individual Retirement Account (IRA) Asset Allocation, by IRA Type, 2010 Traditional-Contributions Roth Traditional-Rollovers SEP/SIMPLE 60% 59.1% 50% 40% 45.5% 41.3% 51.1% 30% 20% 10% 15.5% 12.2% 10.5% 9.9% 20.5% 9.8% 19.8% 13.5% 7.7% 7.2% 12.8% 12.6% 15.8% 8.5% 16.1% 10.6% 0% Balanced Funds Equity Bond Money Other Source: EBRI IRA Database. Balanced funds include balanced funds, life cycle/style funds, and target date funds. Money includes money market mutual funds and certificate of deposits (CDs). ebri.org Notes October 2012 Vol. 33, No

12 Figure 3 Individual Retirement Account (IRA) Asset Allocation, by IRA Type and Gender, 2010 Balanced Type/Gender Funds a Equity Bond Money b Other Traditional-Contributions Female 11.6% 44.4% 19.4% 10.7% 13.9% Male Unknown Roth Female Male Unknown Traditional-Rollovers Female Male Unknown Source: EBRI IRA Database. a Balanced funds include balanced funds, life cycle/style funds, and target date funds. b Money includes money market mutual funds and certificates of deposit (CDs). Figure 4 Individual Retirement Account (IRA) Asset Allocation, by IRA Type and Age, 2010 Balanced Type/Age Funds a Equity Bond Money b Other Traditional-Contributions Under % 50.7% 16.5% 10.5% 10.7% or older Unknown Roth Under or older Unknown Traditional-Rollovers Under or older Unknown Source: EBRI IRA Database. a Balanced funds include balanced funds, life cycle/style funds, and target date funds. b Money includes money market mutual funds and certificates of deposit (CDs). ebri.org Notes October 2012 Vol. 33, No

13 Figure 5 Individual Retirement Account (IRA) Asset Allocation, by IRA Type and Account Balance, 2010 Balanced Type/Account Balance Funds a Equity Bond Money b Other Traditional-Contributions Less than $10, % 57.3% 8.4% 11.8% 3.4% $10,000 $24, $25,000 $49, $50,000 $99, $100,000 $149, $150,000 $249, $250,000 or more Roth Less than $10, $10,000 $24, $25,000 $49, $50,000 $99, $100,000 $149, $150,000 $249, $250,000 or more Traditional-Rollovers Less than $10, $10,000 $24, $25,000 $49, $50,000 $99, $100,000 $149, $150,000 $249, $250,000 or more Source: EBRI IRA Database. a Balanced funds include balanced funds, life cycle/style funds, and target date funds. b Money includes money market mutual funds and certificates of deposit (CDs). Figure 6 Individual Retirement Account (IRA) Asset Allocation, by Gender and Age, 2010 Balanced Gender/Age Funds a Equity Bond Money b Other Female Under % 50.9% 20.4% 8.0% 0.9% or older Unknown Male Under or older Unknown Unknown Under or older Unknown Source: EBRI IRA Database. a Balanced funds include balanced funds, life cycle/style funds, and target date funds. ebri.org Notes October 2012 Vol. 33, No b Money includes money market mutual funds and certificates of deposit (CDs).

14 Figure 7 Individual Retirement Account (IRA) Asset Allocation, by Gender and Account Balance, 2010 Balanced Gender/Account Balance Funds a Equity Bond Money b Other Female Less than $10, % 57.8% 7.8% 13.1% 1.7% $10,000 $24, $25,000 $49, $50,000 $99, $100,000 $149, $150,000 $249, $250,000 or more Male Less than $10, $10,000 $24, $25,000 $49, $50,000 $99, $100,000 $149, $150,000 $249, $250,000 or more Unknown Less than $10, $10,000 $24, $25,000 $49, $50,000 $99, $100,000 $149, $150,000 $249, $250,000 or more Source: EBRI IRA Database. a Balanced funds include balanced funds, life cycle/style funds, and target date funds. b Money includes money market mutual funds and certificates of deposit (CDs). Allocations by Age Account Balance The same general asset allocation patterns noted above emerged among each age category as the account balances changed (Figure 8); however, the relative allocation levels across the age groups showed some differences. For instance, beginning with the age group, bond allocations were higher for older IRA owners than for younger owners within each account balance group. The allocation to bonds increased as the account balances increased in each age group. Equity allocations for the youngest (under age 35) IRA owners with small account balances were the lowest across the age groups. However, when balances reached $10,000 or more, younger IRA owners had significant increases in equity allocations, such that those ages with the largest account balances had the largest equity allocation. Those under age 45 were much more likely to use balanced funds than were older IRA owners, and those under age 35 with balances less than $25,000 had particularly higher allocations to balanced funds. Extreme Allocations 11 This section investigates the percentage of IRAs that have so-called extreme allocations, defined here as having less than 10 percent or more than 90 percent in a particular asset category. 12 Type The most significant difference among IRA types is that Roth owners were much more likely to have 90 percent or more of their accounts invested in equities than in other asset types (Figure 9). Furthermore, Roth owners were correspondingly more likely to have less than 10 percent of their assets in bonds and money combined. Traditional-contributions and SEP/SIMPLE owners have relatively similar likelihoods of extreme allocations for equities and bonds, whereas traditional-contributions owners were less likely to have very high money use. Traditional-rollover IRA owners were much less likely to have more than 90 percent of their assets in equities and more likely to have large allocations to money/cash investments. Gender The likelihood of extreme allocations was very similar across genders (Figure 9). For instance, 38.6 percent of females had more than 90 percent in equities, compared with 37.1 percent for males. Similarly, 58.7 percent of females had less than 10 percent in bonds, while 61.2 percent of males did. Age After age 25, the older the IRA owners, the more likely they were to have more than 90 percent in bonds (Figure 9). Furthermore, above age 35, the likelihood that an IRA owner had more than 90 percent in equities decreased with each age grouping. This shift follows the standard investing rule of thumb that individuals should reduce their allocation to assets with high variability in returns (equities) as they age. In general, the results for those age 35 or older follow the pattern of moving assets away from equities and to bonds and money as the owners became older. ebri.org Notes October 2012 Vol. 33, No

15 Balanced Age/Account Balance Funds a Equity Bond Money b Other Balanced Under 25 Age/Account Balance Funds a Equity Bond Money b Other Less than $10, % 47.4% 5.8% 16.2% 1.1% $10,000 $24, Less than $10, $25,000 $49, $10,000 $24, $50,000 $99, $25,000 $49, $100,000 $149, $50,000 $99, $150,000 $249, $100,000 $149, $250,000 or more $150,000 $249, $250,000 or more Less than $10, $10,000 $24, Less than $10, $25,000 $49, $10,000 $24, $50,000 $99, $25,000 $49, $100,000 $149, $50,000 $99, $150,000 $249, $100,000 $149, $250,000 or more $150,000 $249, $250,000 or more Less than $10, or older $10,000 $24, Less than $10, $25,000 $49, $10,000 $24, $50,000 $99, $25,000 $49, $100,000 $149, $50,000 $99, $150,000 $249, $100,000 $149, $250,000 or more $150,000 $249, $250,000 or more Less than $10, Unknown $10,000 $24, Less than $10, $25,000 $49, $10,000 $24, $50,000 $99, $25,000 $49, $100,000 $149, $50,000 $99, $150,000 $249, $100,000 $149, $250,000 or more $150,000 $249, (cont'd.) Figure 8 Individual Retirement Account (IRA) Asset Allocation, by Age and Account Balance, 2010 (cont'd.) $250,000 or more Source: EBRI IRA Database. a Balanced funds include balanced funds, life cycle/style funds, and target date funds. b Money includes money market mutual funds and certificates of deposit (CDs). ebri.org Notes October 2012 Vol. 33, No

16 Figure 9 Percentage of Individual Retirement Accounts (IRAs) With Extreme Asset Allocations, a by Various Characteristics, 2010 Less than More than Less than More than Less than More than Less than More than 10% in 90% in 10% in 90% in 10% in 90% in 10% in 90% in Bonds b & Bonds b & Bonds b Bonds b Equities c Equities c Money d Money d Money d Money d All 58.3% 4.6% 19.6% 37.4% 83.8% 7.8% 44.7% 13.1% Type Traditional-Cont Roth Traditional-Rlvr SEP/SIMPLE Gender Female Male Unknown Age Under or older Unknown Account Balance Less than $10, $10,000 $24, $25,000 $49, $50,000 $99, $100,000 $149, $150,000 $249, $250,000 or more Source: EBRI IRA Database. a Extreme asset allocations refer to almost no assets (less than 10 percent) or almost all (more than 90 percent). b Bonds include the bond portion of the balanced funds. c Equities include the equity portion from balanced funds. d Money includes money market mutual funds and certificates of deposit (CDs). Account Balance IRA owners with higher account balances were less likely to have extreme asset allocations (Figure 9). For instance, while 48.1 percent of those with account balances of less than $10,000 had more than 90 percent of their assets in equities, only 12.6 percent of those with account balances of $250,000 or more did. Further-more, accounts with higher balances were less likely to have either less than 10 percent or more than 90 percent combined in money and bonds. Overall Allocation Including Annuities For some of the accounts in the database, an additional category, annuities, was identified for the asset allocation. 13 Focusing on those accounts from data providers that differentiate annuity investments, 8.6 percent of all the assets were in this category (Figure 10), while allocations to the remaining categories, except for the other and balancedfund categories, were very similar to that found in the overall database results (Figure 1). For example, among the accounts with annuities identified, 20.6 percent of the assets were in bonds, compared with 19.9 percent among all the accounts. Equities made up 47.7 percent for the annuity-differentiated accounts, while they constituted 45.7 per- ebri.org Notes October 2012 Vol. 33, No

17 cent for all of the accounts. Male and female IRA owners had virtually identical allocations to bonds, equities, and money. However, males were slightly more likely to have assets in the other category, while females had a slightly higher percentage of assets in annuities. For IRA owners age 25 or older through age 69, the percentage of assets allocated to annuities increased with each age bracket 1.8 percent for those ages vs percent for those age As account balances increased, the percentage of assets in annuities also increased, at least to the point where the account balances reached $250,000 or more. Among accounts with less than $10,000 in assets, 1.7 percent of assets were in annuities, compared with 11.0 percent for accounts with $150,000 $249,999. Traditional-contribution IRAs had the highest share of assets in annuities (10.2 percent), while Roth IRAs had the lowest (1.8 percent). Figure 10 Individual Retirement Account (IRA) Asset Allocation, by Various Characteristics, 2010 (For Accounts With Annuities Broken Out) Balanced Funds a Equity Bond Money b Annuities Other All 5.6% 47.7% 20.6% 7.7% 8.6% 9.8% Gender Female Male Unknown Age Under or older Unknown Account Balance Less than $10, $10,000 $24, $25,000 $49, $50,000 $99, $100,000 $149, $150,000 $249, $250,000 or more Type Traditional-Cont Roth Traditional-Rlvr SEP/SIMPLE Source: EBRI IRA Database. a Balanced funds include balanced funds, life cycle/style funds, and target date funds. b Money includes money market mutual funds and certificates of deposit (CDs). Conclusion This study provides the latest look at asset allocation in IRA accounts from the EBRI IRA Database. Approximately one-half of all IRA assets were found to be allocated to equities, although this varied with age, account balance, and IRA type. Gender differences in asset allocations were very minimal. Those older, having higher account balances, or owning traditional-rollover IRAs had, on average, lower allocations to equities. The average asset allocation found for IRAs was similar to that in 401(k) plans. When comparing the overall percentage of 401(k) assets held in equities (equities, equity share in balanced funds, and company stock) from the EBRI/ICI 401(k) Database, 14 the number is relatively close to that found in the IRA accounts (60.0 percent in 401(k) plans and 52.1 percent in IRAs), although the bond and money percentages are higher for IRAs than 401(k) plans (19.9 percent and 11.6 percent respectively for bonds and 8.9 percent and 4.4 percent respectively for money). Balanced funds constitute more of the assets in 401(k) plans than in IRAs, while the other asset category has a similar allocation across account types. While the average asset allocation to equities was higher in 401(k) plans, individuals in IRAs were slightly more likely to have more than 80 percent in equities than were 401(k) participants. 15 An IRA could be only part of an individual s portfolio of retirement assets, as a DC plan at a current or previous employer could also be owned. Therefore, the total retirement assets an individual holds cannot be determined by ebri.org Notes October 2012 Vol. 33, No

18 looking only at account studies, which may understate the total assets that an individual has accumulated in these types of plans, because the studies examine accounts separately instead of by aggregation of the accounts. Consequently, the goal of the integration of the EBRI databases is be able to look at the two largest sources of retirement assets (IRAs and DC plans) to be able to examine the assets and allocations, the behavior of individuals across these accounts, as well as behavior within the accounts, in order to gain a better understanding of the decisions Americans make in their retirement savings accounts. As the EBRI IRA Database expands, more elaborate studies are being conducted. Linked with defined contribution account data, the tracking of movements of money between multiple retirement saving accounts (DC plans and IRAs) is being studied to see what, if any, asset allocation changes are being made when assets are moved between accounts. Furthermore, once individuals have reached retirement, the withdrawal or spend-down of those assets over time can be studied based on the longitudinal data that will be available, offering the potential of a far greater understanding of the retirement preparation and post-retirement behavior of Americans as these databases mature. ebri.org Notes October 2012 Vol. 33, No

19 Endnotes 1 See Figure A in Craig Copeland, Individual Retirement Account Balances, Contributions, and Rollovers, 2010: The EBRI IRA Database, EBRI Issue Brief, no. 371 (Employee Benefit Research Institute, May 2012). 2 See Jack VanDerhei, Sarah Holden, Luis Alonso, and Steven Bass, 401(k) Plan Asset Allocation, Account Balances, and Loan Activity In EBRI Issue Brief, no. 366 (Employee Benefit Research Institute and ICI Perspective, December 2011) for the most recent information on the 401(k) participant data. 3 See Craig Copeland, IRA Asset Allocation EBRI Notes, no. 5 (Employee Benefit Research Institute, May 2011): See Copeland (May 2012) (Endnote 1) for results from the database for 2010 on balances, rollovers, and contributions. 5 Below is a comparison of the EBRI IRA Database with numbers from the Internal Revenue Service (IRS) and the Federal Reserve s Flow of Funds. EBRI Database EBRI Database Internal Revenue Flow of Funds Service 2004 Data 2010 Data Total Assets $732.9 billion $1.002 trillion $3.3 trillion $4.7 trillion Percentage Traditional Assets 87.8% 85.9% 89.6% Average Rollover Amount $74,528 $69,012 $59,100 Average Traditional Contributions $3,798 $3,335 $3,623 The above percentage of traditional assets is adjusted for the known asset categories. With the unknown assets included, the all traditional IRA combined asset percentage is 70.2 percent. Based on this asset comparison, the database includes about 1/5 of the assets, and the number of individuals owning IRAs is about the same ratio, since 50.9 million individuals owned IRAs in See Victoria L. Bryant, Accumulation and Distribution of Individual Account Arrangements, Statistics of Income Bulletin, Spring 2008, pp , for complete IRS tabs of IRAs. Also see Board of Governors of the Federal Reserve System, Flow of Funds Accounts of the United States: Flows and Outstandings First Quarter for the Flow of Funds results. 6 The distributions between the overall database and the portion with complete asset allocation by age and gender of the owners and the account balance and type are very similar. Only a higher percentage of smaller accounts in the overall database than in the asset allocation portion appear to be noticeable. See Figure A for a comparison of these distributions. Figure A Distribution of Individual Retirement Accounts (IRAs), by Asset Allocation Data and Various Characteristics, 2010 Complete Annuities Complete Annuities All Asset Broken All Asset Broken Accounts Allocation Out Accounts Allocation Out All 100.0% 100.0% 100.0% All 100.0% 100.0% 100.0% Gender Account Balance Female Less than $10, Male $10,000 $24, Unknown $25,000 $49, Age $50,000 $99, Under $100,000 $149, $150,000 $249, $250,000 or more Type Traditional-Cont Roth or older Traditional-Rlvr Unknown SEP/SIMPLE (cont'd.) Source: EBRI IRA Database. ebri.org Notes October 2012 Vol. 33, No

20 7 Traditional IRAs are broken down into categories based on how the accounts originated with the data providers, either through contributions or through rollovers from other tax-qualified vehicles. Both types of these accounts could have received contributions or rollovers after their origination, so these are NOT proxies for employment-based dollars vs. IRAonly dollars. The traditional-rollovers do provide an estimate of the dollars that have been moved into new IRAs, regardless of their original holding places. The remainder of this article will use the simplified labels of traditional-contribution and traditional-rollover to refer to the origination of the accounts. Furthermore, the account type for some of the accounts could not be identified, so they are placed in the unknown category. 8 All traditional IRAs combined make up 67.8 percent of the identified IRAs and Roth IRAs 24.8 percent. As noted above, all traditional IRAs combined make up 85.9 percent of the assets. 9 The one government data source, the Survey of Consumer Finances (SCF), which has significant detail of all U.S. families wealth, including IRA- and DC-plan wealth, reports only an allocation between equity and interest-bearing assets. As this database shows, there is a significant amount of assets in balanced funds and other assets that are not strictly equities or interest bearing but are being represented as such in the data. See Craig Copeland, Retirement Plan Participation and Asset Allocation, 2007, EBRI Notes, no. 11 (Employee Benefit Research Institute, November 2009): for results on asset allocation from the survey; and Brian K. Bucks, Arthur B. Kennickell, and Kevin B. Moore, Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances, Federal Reserve Bulletin, Vol. 95 (February 2009): A1 A55 (last reviewed February 2011) for more information on the Survey of Consumer Finances. 10 The total equity allocation is estimated by assuming that all balanced funds have 60 percent in equities and 40 percent in bonds. However, target date funds are included in the balanced funds, so while this estimation methodology is not likely to hold across ages, on an overall basis it remains a workable indicator of the average allocation between the two asset classes. 11 For the complete distribution of equities, bonds, and money, see the additional figures on the EBRI website at this URL: 12 The allocations to bonds and equities include the portion of balanced funds that come from each asset type. The assumed percentage, like above, is that 60 percent of the balanced assets are from equities and 40 percent are from bonds. 13 Of the total accounts with asset allocation, 6.1 million ($0.535 trillion in assets) have an annuities category broken out (see Figure A for a comparison between the overall sample, the complete asset allocation sample, and the annuities-brokenout sample). In the remaining accounts, annuities were included in the other category. Therefore, in the overall results (even for the accounts with annuities) these assets are included in the other category. Annuities could be either fixed or variable. 14 See VanDerhei, et al., (Endnote 2). 15 Figure 30 in VanDerhei, et al., (Endnote 2) shows that 40 percent of 401(k) participants had 80 percent or more in equities including the equity portion in balanced funds and company stock. Just over 43 percent of IRAs had more than 80 percent in equities when including sixty percent of the balanced-fund assets as equities. ebri.org Notes October 2012 Vol. 33, No

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24 EBRI Employee Benefit Research Institute Notes (ISSN ) is published monthly by the Employee Benefit Research Institute, th St. NW, Suite 878, Washington, DC , at $300 per year or is included as part of a membership subscription. Periodicals postage rate paid in Washington, DC, and additional mailing offices. POSTMASTER: Send address changes to: EBRI Notes, th St. NW, Suite 878, Washington, DC Copyright 2012 by Employee Benefit Research Institute. All rights reserved, Vol. 33, no. 10. Who we are What we do Our publications Orders/ Subscriptions The Employee Benefit Research Institute (EBRI) was founded in Its mission is to contribute to, to encourage, and to enhance the development of sound employee benefit programs and sound public policy through objective research and education. EBRI is the only private, nonprofit, nonpartisan, Washington, DC-based organization committed exclusively to public policy research and education on economic security and employee benefit issues. EBRI s membership includes a cross-section of pension funds; businesses; trade associations; labor unions; health care providers and insurers; government organizations; and service firms. EBRI s work advances knowledge and understanding of employee benefits and their importance to the nation s economy among policymakers, the news media, and the public. It does this by conducting and publishing policy research, analysis, and special reports on employee benefits issues; holding educational briefings for EBRI members, congressional and federal agency staff, and the news media; and sponsoring public opinion surveys on employee benefit issues. EBRI s Education and Research Fund (EBRI-ERF) performs the charitable, educational, and scientific functions of the Institute. EBRI-ERF is a tax-exempt organization supported by contributions and grants. EBRI Issue Briefs are periodicals providing expert evaluations of employee benefit issues and trends, as well as critical analyses of employee benefit policies and proposals. EBRI Notes is a monthly periodical providing current information on a variety of employee benefit topics. EBRI s Fundamentals of Employee Benefit Programs offers a straightforward, basic explanation of employee benefit programs in the private and public sectors. The EBRI Databook on Employee Benefits is a statistical reference work on employee benefit programs and work force-related issues. Contact EBRI Publications, (202) ; fax publication orders to (202) Subscriptions to EBRI Issue Briefs are included as part of EBRI membership, or as part of a $199 annual subscription to EBRI Notes and EBRI Issue Briefs. Change of Address: EBRI, th St. NW, Suite 878, Washington, DC, , (202) ; fax number, (202) ; subscriptions@ebri.org Membership Information: Inquiries regarding EBRI membership and/or contributions to EBRI-ERF should be directed to EBRI President Dallas Salisbury at the above address, (202) ; salisbury@ebri.org Editorial Board: Dallas L. Salisbury, publisher; Stephen Blakely, editor. Any views expressed in this publication and those of the authors should not be ascribed to the officers, trustees, members, or other sponsors of the Employee Benefit Research Institute, the EBRI Education and Research Fund, or their staffs. Nothing herein is to be construed as an attempt to aid or hinder the adoption of any pending legislation, regulation, or interpretative rule, or as legal, accounting, actuarial, or other such professional advice. EBRI Notes is registered in the U.S. Patent and Trademark Office. ISSN: /90 $ , Employee Benefit Research Institute Education and Research Fund. All rights reserved.