Working Paper: NBER ID: w24405
Authors: Arna Olafsson; Michaela Pagel
Abstract: This paper uses a detailed panel of individual spending, income, account balances, and credit limits from a personal finance management software provider to investigate how expenditures, liquid savings, and consumer debt change around retirement. The longitudinal nature of our data allows us to estimate individual fixed-effects regressions and thereby control for all selection on time-invariant (un)observables. We provide new evidence on the retirement-consumption puzzle and on whether individuals save adequately for retirement. We find that, upon retirement, individuals reduce their spending in both work-related and leisure categories. However, we feel that it is difficult to tell conclusively whether expenses are work related or not, even with the best data. We thus look at household finances and find that individuals delever upon retirement by reducing consumer debt and increasing liquid savings. We argue that these findings are difficult to rationalize via, for example, work-related expenses. A rational agent would save before retirement because of the expected fall in income, and dissave after retirement, rather than the exact opposite
Keywords: retirement; consumption; personal finance; savings; debt
JEL Codes: D12; D14; E21; J26; J32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Retirement (J26) | Reduction in spending (H61) |
| Reduction in spending (H61) | Rational adjustment in consumption patterns (D15) |
| Reduction in spending (H61) | Deleveraging by reducing consumer debt (G51) |
| Reduction in spending (H61) | Increase in liquid savings (E21) |
| Overconsumption before retirement (D14) | Decrease in consumption post-retirement (D15) |
| Decrease in consumption post-retirement (D15) | Behavioral issue (hyperbolic discounting) (D15) |