The Retirement-Consumption Puzzle

Anticipated and Actual Declines in Spending at Retirement

by Michael D. Hurd, Susann Rohwedder

Download eBook for Free

FormatFile SizeNotes
PDF file 0.5 MB

Use Adobe Acrobat Reader version 10 or higher for the best experience.

The simple one-good model of life-cycle consumption requires “consumption smoothing.” However, British and U.S. households apparently reduce consumption at retirement and the reduction cannot be explained by the life-cycle model. An interpretation is that retirees are surprised by the inadequacy of resources. This interpretation challenges the life-cycle model where consumers are forward looking. However, data on anticipated consumption changes at retirement and on realized consumption changes following retirement show that the reductions are fully anticipated. Apparently the decline is due to the cessation of work-related expenses and the substitution of home production for market-purchased goods and services.

The research described in this report was performed under the auspices of RAND Labor and Population and was supported by the Social Security Administration via a grant to the Michigan Retirement Research Center. Additional support for data development was provided by the National Institute on Aging.

This report is part of the RAND Corporation working paper series. RAND working papers are intended to share researchers' latest findings and to solicit informal peer review. They have been approved for circulation by RAND but may not have been formally edited or peer reviewed.

The RAND Corporation is a nonprofit institution that helps improve policy and decisionmaking through research and analysis. RAND's publications do not necessarily reflect the opinions of its research clients and sponsors.