Working Paper: NBER ID: w13789
Authors: Erik Hurst
Abstract: This paper summarizes five facts that have emerged from the recent literature on consumption behavior during retirement. Collectively, the recent literature has shown that there is no puzzle with respect to the spending patterns of most households as they transition into retirement. In particular, the literature has shown that there is substantial heterogeneity in spending changes at retirement across consumption categories. The declines in spending during retirement for the average household are limited to the categories of food and work related expenses. Spending in nearly all other categories of non-durable expenditure remains constant or increases. Moreover, even though food spending declines during retirement, actual food intake remains constant. The literature also shows that there is substantial heterogeneity across households in the change in expenditure associated with retirement. Much of this heterogeneity, however, can be explained by households involuntarily retiring due to deteriorating health. Overall, the literature shows that the standard model of lifecycle consumption augmented with home production and uncertain health shocks does well in explaining the consumption patterns of most households as they transition into retirement.
Keywords: retirement; consumption; health shocks; lifecycle model
JEL Codes: D11; E21; J26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| health shocks (I12) | declines in food spending (D12) |
| health shocks (I12) | declines in work-related expenses (J32) |
| involuntary retirement due to health shocks (J26) | declines in expenditures (H59) |
| declines in food spending (D12) | constant food intake (D10) |
| lower pre-retirement wealth (D14) | more significant declines in expenditure (H59) |
| health shocks (I12) | involuntary retirement (J26) |