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Heterogeneity in spending change at retirement
Michael D Hurd1, Susann Rohwedder2
1RAND Corporation, USA ; NBER, USA ; NETSPAR, Netherlands.
Journal of the Economics of Ageing
|February 14, 2014
Summary
Spending declines slightly at retirement, contrary to the simple life-cycle model. Factors like reduced work expenses and health issues explain variations, with higher wealth groups increasing spending.
Area of Science:
- Behavioral Economics
- Retirement Planning
- Consumer Spending Analysis
Background:
- The life-cycle consumption model predicts continuous spending throughout retirement.
- Prior studies indicated a significant drop in spending at retirement, termed the 'retirement-consumption puzzle'.
- Previous research often relied on partial consumption measures or synthetic panels.
Purpose of the Study:
- To investigate the retirement-consumption puzzle using comprehensive panel data.
- To identify factors influencing consumption changes at retirement.
- To examine heterogeneity in spending patterns across the wealth distribution.
Main Methods:
- Utilized panel data tracking total, nondurable, and food spending.
- Analyzed spending changes specifically at the point of retirement.
- Segmented analysis by wealth distribution to identify differential impacts.
Main Results:
- Spending declines at retirement occur at low rates, potentially explained by reduced work-related costs or health shocks.
- Significant heterogeneity observed: spending increased in the upper wealth distribution.
- In the low-wealth population, spending declined more sharply, linked to early retirement due to poor health and potentially short planning horizons.
Conclusions:
- The retirement-consumption puzzle is less pronounced than previously thought, with small declines explained by specific mechanisms.
- Wealth significantly moderates consumption changes at retirement.
- Health status and planning horizons are critical factors for low-wealth individuals entering retirement.
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