The Retirement Consumption Gap: Evidence from the HRS
25 Pages Posted: 8 Nov 2014
Date Written: August 11, 2014
Research on post-retirement asset decumulation shows that many retired households are consuming from their financial assets at a very slow rate or not at all. Factors commonly associated with this phenomenon are the complexity of decumulation decisions, uncertain longevity and medical costs, home production, and bequest motives. Using a product allocation framework and data from the Health and Retirement Study we provide evidence of a retirement consumption gap for those with financial assets in the third, fourth, and fifth quintiles. In comparison to previous studies that focus on changes in financial asset values over time to examine post-retirement consumption, our methodology provides a more dynamic evaluation of consumption behavior and quantifies the consumption available to and forgone by retirees under a variety of asset allocation strategies. When incorporating the effects of uncertain longevity, uncertain medical costs, and bequests we find that retirees with median wealth have a consumption gap of approximately 8% on average and that retirees with higher levels of wealth have a consumption gap as high as 45.6%. We discuss the implications of these findings and considerations for future research addressing this topic.
Keywords: Retirement, Consumption, Decumulation
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