Can the retirement consumption puzzle be solved?

Abstract

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Consumer Expenditures and Home Production at Retirement – New Evidence from Germany

“…The life cycle model predicts that rational forward-looking agents make their savings decisions such that consumption is smoothed over the life cycle (Modigliani and Brumberg, 1954). In spite of several extensions of the life cycle model which comprise uncertainty about the length of life, precautionary savings motives, and bequest motives, the model has been challenged by empirical studies showing that US and British households reduce their consumer expenditures significantly upon entry into retirement (Aguiar and Hurst, 2005;Banks et al, 1998;Hurd and Rohwedder, 2005;Miniaci et al, 2003;Smith, 2004). Bernheim et al (2001) find that 31% of US households reduce their expenses by at least 35 percentage points at retirement, while Hamermesh (1984) found that 53% of the retired couples reduced their spending by more than 10% relative to the average change in real spending between 1973and 1975.…”

Back to Work: Expectations and Realizations of Work after Retirement

“… 1 A growing literature has examined whether such shocks can explain the seemingly “irrational” drops in consumption spending after retirement known as the retirement-consumption puzzle (Banks, Blundell, and Tanner 1998; Haider and Stephens 2004; Hurd and Rohwedder 2003; Smith 2004). …”

Back to Work

“… 1 A growing literature has examined whether such shocks can explain the seemingly “irrational” drops in consumption spending after retirement known as the retirement-consumption puzzle (Banks, Blundell, and Tanner 1998; Haider and Stephens 2004; Hurd and Rohwedder 2003; Smith 2004). …”