Changes in Consumption and Activities at Retirement

The life-cycle model is used by many economists to study savings and retirement behavior. Th e central premise of the model is that individuals will save during their working lives so that they will have adequate resources at retirement (when wages are no longer a source of income) to maintain the standard of living they enjoyed during their working lives. Some empirical fi ndings, however, are at odds with this prediction. British and U.S. households apparently reduce spending, or consumption at retirement. Th e reduction cannot be explained by the life-cycle model, so it has been referred to as the retirement-consumption puzzle. An interpretation is that at retirement individuals discover they have fewer economic resources than they had anticipated prior to retirement, and as Economists have used the term retirement-consumption puzzle to refer to the finding that individuals seem to reach retirement not adequately prepared and appear to reduce spending in response. Following workers over time, this study shows that fewer than half of those who retire recollect a spending decline at retirement. Actual spending change also does not decline at retirement. We find no evidence for a lack of forward-looking behavior: anticipations are broadly consistent with recollections, and the median actual spending change is approximately zero. There is no retirement-consumption puzzle based on our direct measure of spending change at retirement.