Income and wealth

During the course of life

Do households diminish their wealth during retirement? The life-cycle model by Modigliani and Brumberg
(1954) suggests they do, but the empirical evidence in the literature does not support this hypothesis. The lack of support may be due to uncertainty about lifetime or medical expenses or due to a bequest motive,
according to more recent models in the life-cycle literature. In addition, households may be restricted in
diminishing their wealth because it is illiquid. As consumption during retirement can also be financed by
income instead of by wealth, we investigate income changes due to retirement and other life events as well. The purpose of this paper is to sketch the trajectories of income and wealth during the course of life and the effects of life events in the Netherlands.

To gain more insight into household income and wealth during the course of life, we examine their
trajectories in a balanced panel of over two million Dutch households. First, we analyze the trajectories of
income in a balanced panel of households over the period 2006–2013. We compute the low (p25), median
(p50) and high (p75) income percentiles to describe the income distribution at different ages. In addition, we identify to what extent the death of a spouse or a divorce influences income during retirement. Next, we track net wealth and its main components – housing wealth and financial wealth – to learn more about the wealth position of households at different ages, again using the p25, p50 and p75 measures. In addition, we study to what extent shocks in marital status affect wealth during retirement. We distinguish between retired couples with and without children to identify a potential bequest motive.

The gross income of Dutch retirees is roughly half the income of their working contemporaries. The reduction is probably due to both cohort and age effects. Income is significantly affected by changes in marital status: widowhood causes a decrease in household income, but a significant increase in personal income, especially for women.

We find no evidence of wealth decumulation during retirement. Bank deposits remain roughly stable for most age cohorts. At the higher end of the wealth distribution, the bank deposits of households increase, while stock ownership decreases at very high ages, making the portfolio less risky. There is no evidence that households exchange owner-occupied housing with rental housing at higher ages to extract wealth for
consumption purposes. Van Ooijen et al. (2015) also study the evolution of wealth during retirement. Their study is similar to ours, but includes a much smaller sample and a shorter time horizon. Moreover, the study pays less attention to the distribution of wealth. The authors find that Dutch households hold onto large amounts of wealth during retirement. If a member of a household is struck by a major disease, savings in financial assets increase. After the death of a spouse, net wealth decreases, however.

The rest of this paper is organized as follows. In section 2, we review the literature on the life-cycle hypothesis and on the trajectories of wealth during retirement. Section 3 provides some information on the micro-data used and presents the demographic characteristics of our sample. Section 4 describes the trajectories of income and wealth during the course of life and after life events. Section 5 concludes.

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