Do Retirees Want Constant, Increasing, or Decreasing Consumption?

Abstract

Whether households prefer a constant, increasing, or decreasing path of consumption in retirement has important implications for our understanding of retirement adequacy.  Financial planners and researchers have often assumed that retirees would like to maintain their pre-retirement standard of living.  However, several studies suggest that retired households decrease their consumption over time.  This project builds on the existing literature by: 1) examining retirement consumption over longer periods; 2) using wealth to separate constrained and unconstrained households in order to analyze whether declines in consumption are driven by necessity or preferences; and 3) exploring whether, within unconstrained households, those with steeper mortality profiles are more likely to front-load consumption.

The paper found that:

• On average, household consumption declines about 0.7-0.8 percent a year over retirement.
• However, consumption for wealthy and healthy households is virtually flat, declining only 0.3 percent a year over their retirement.
• Thus, at least in part, wealth and health constraints help explain the observed pattern of declining consumption.

The policy implications are:

• Retirees likely prefer to enjoy constant consumption in retirement.
• The results suggest that a retirement saving shortfall exists since consumption declines are larger for households without assets.
• Social Security is an important resource for maintaining their preferred consumption.