Dipping into retirement funds doesn’t necessarily have a bad effect

Dipping into retirement funds doesn’t necessarily have a bad effectSeptember 22, 2001Cynthia J. Moritzcjmoritz@syr.edu

Workers, at least those born between 1931 and 1941, have not doomed themselves to a poverty-stricken old age by frittering away their retirement nest eggs, according to Center for Policy Research (CPR) Associate Professor Gary V. Engelhardt. Many have withdrawn some money from their retirement accounts, but not enough to seriously deplete their retirement savings.

Engelhardt based his conclusions on an analysis of data gathered as part of the Health and Retirement Study, a nationally representative, ongoing survey of individuals who were between the ages of 51 and 61 when the study began in 1992. His conclusions were recently published in a CPR policy brief, “How Does Dipping into Your Pension Affect Your Retirement Wealth?”

“There is a tremendous amount of interest in whether people are hurting themselves by dipping into their retirement nest eggs when they change jobs,” Engelhardt says. “This study shows that they are dipping into those funds, but generally only in minor ways that don’t really hurt them in the long run.”

Engelhardt’s analysis shows that if pension assets that were spent had been saved instead, they would have increased the worker’s retirement wealth by only about 10 percent. However, there is a small group of people who spent enough of their assets to decrease their retirement wealth by as much as 25 percent.

When workers change jobs, retirement funds accumulated through the old job can be withdrawn, rolled over into an Individual Retirement Account or deposited in the retirement account sponsored by the new employer. What workers tend to do with these funds is largely a function of how much money has accumulated. They are likely to spend the funds if they are small, but tend to preserve them if they are large.

Most people in the study held several short-term jobs before they settled into a “career” job of long duration, Engelhardt says. They may have spent the retirement funds accumulated during those first few jobs, but the assets that were built up while working at the long-term job have tended to accumulate until retirement.

Engelhardt is not sure whether his conclusions can be generalized to the greater population because the age group examined in the study may differ in significant ways from younger workers. For one thing, workers born between 1931 and 1941 are part of a generation where many of the jobs were in manufacturing and many were unionized. Pensions tended not to be portable or accessible; that is, workers couldn’t take the accumulated funds with them if they changed jobs, and they had no access to the funds before retirement.

Younger workers tend to hold non-union service jobs, and old-style pensions have been replaced by defined contribution pension plans in which assets accumulate in an individual account that employees can take with them or access when they change jobs. These workers may also differ from older workers in that they may not settle into a “career” job, but may keep changing jobs throughout their lives. And they may dipinto their retirement funds more often, or more deeply.

In addition, the workers in the study are part of the generation that grew up during or just after the Depression. Popular lore has it that this generation, because of its childhood experiences of being deprived, is especially focused on saving. No one knows if this is fact or myth, Engelhardt says, but if it is true, it could make the workers in the study significantly different from younger workers, who have grown up in generally prosperous times.