Consumption in Retirement: Recent Developments

In this paper, I survey the recent literature on the behavior of consumption as households transition to retirement. A large literature has emerged showing a “retirement consumption puzzle”a sharp decline in expenditures as households transition into retirement. However, after aggregating the results of the literature, I show that the “retirement consumption puzzle” is a misnomer. The only categories where consumption, on average, is consistently found to decline upon retirement are work related expenses and food. Moreover, recent research shows that the decline in food expenditures at the time of retirement is no puzzle at all given that actual food intake remains constant through retirement. The falling food expenditure is due to the additional allocation of time towards home production of food among retirees. Lastly, there is evidence that there is a tremendous amount of heterogeneity in expenditure declines up retirement within the population with households in the lowest pre-retirement wealth quartile experiencing the largest expenditure declines. Some of this heterogeneity, however, can be explained by households involuntarily retiring (often due to health shocks). But, there is also evidence that some households do not accumulate enough resources during their working years to maintain their marginal utility of consumption through retirement. In summary, I conclude that, for most households, the “retirement consumption puzzle” is dead. Standard models of lifecycle consumption augmented with home production and uncertain health shocks can explain the consumption patterns of most households as they transition into retirement