Retirement Consumption Puzzle Research Articles

The Retirement Consumption Puzzle Effect in Indonesia: Evidence from IFLS 4 and 5

Introduction/Main Objectives: This study aims to see whether the retirement consumption puzzle occurs in Indonesia. The retirement consumption puzzle refers to when there is a decline in consumption in retirement which is not in line with the life-cycle hypothesis. Background Problems: Previous studies have revealed that consump­tion shifts when entering retirement due to efficient spending. This research analyzes the consumption pattern of the Indonesian elderly peculiarly in the frame of the retirement consumption puzzle. Novelty: There is a lack of studies on the effect of retirement on consumption by Indonesian retirees and prior research has focused on the impact of retirement on household expenditure. Research Methods: This study uses data from the Indonesian Family Life Survey (IFLS) wave 4 and 5 from the years 2007 and 2014. It uses panel data and the total sample is 2,556. It also uses the difference in differences (DiD) method to see whether the change in labor status toward retirement causes a decrease in consumption in households in Indonesia. Then, this study also uses the division of age categories as the robustness check. Finding/Results: The results of this study show that there is a retirement consumption puzzle in Indonesia indicated by a decrease of 19.9% in total expenditure per capita. Conclusion: The consumption decrease in retirement demons­trates that the government should consider pension funds and create social security programs to maintain the welfare of elderly people.

The Retirement Consumption Puzzle: A Mental Accounting Explanation

Recent developments in cognitive psychology and behavioral economics may explain the lower-than-predicted asset decumulation behavior posited by traditional life-cycle models during retirement, dubbed the retirement consumption puzzle. This study examines if mental accounting could be used to explain the retirement consumption puzzle. Utilizing panel data collected from the 1992–2018 Health and Retirement Studies, retiree age and age squared are examined using fractional polynomials and fixed effects regressions for their associations with varying categorical retiree asset decumulation patterns, including retiree wealth, nonhousing wealth, stocks, retirement accounts, bonds, liquid assets, vehicles, primary residence, and home equity. The results suggest that varying asset decumulation behaviors exist among retirees, which could be explained by retirees’ discretionary spending propensities. The discussion highlights the importance of understanding retiree behavioral spending constraints to allow for smooth consumption paths.

Updating the Retirement-Consumption Puzzle in Italy: Who are the Most Affected?

Updating the Retirement-Consumption Puzzle in Italy: Who are the Most Affected?

Retirement consumption puzzle in tourism: evidence from CHARLS

ABSTRACT Studies have shown that tourism consumption is an effective way for active ageing by improving older adults’ well-being and quality of life. However, there is currently a literature gap on post-retirement tourism consumption. This study used the fuzzy regression discontinuity design to explore the changes in tourism consumption after retirement with a longitudinal database, China Health and Retirement Longitudinal Study. We found a retirement consumption puzzle in tourism consumption amongst older adults, as well as gender differences. Furthermore, the inhibition effect of retirement on tourism consumption of older people can be alleviated by strengthening family interaction, enhancing their participation in social activities and providing tourism products-based gender heterogeneity.

Does Retirement Reduce Household Food Consumption Expenditure in Cameroon?

The objective of this article is to investigate the effect of retirement on household food consumption expenditure in Cameroon. We use a fuzzy regression-discontinuity method to identify the effect of retirement on household food consumption expenditure. We estimate the retirement equation and instrumental equation with food consumption expenditure equations in a two-stage least squares (2SLS) framework. Our data come from the Fourth Household Survey (ECAM4) organized in Cameroon by the National Institute of Statistics (NIS) in 2014. The results confirm the existence of the retirement-consumption puzzle in the case of food expenditure and restaurant and hotel expenditure. Food expenditure falls in retirement by 55.6 percentage points and spending on restaurants and hotels falls by 65 percentage points, reflecting the precariousness of the pension system in Cameroon. In the case of beverage expenditure, on the contrary, we observe an increase in alcohol expenditure in retirement.

The retirement (food)-consumption puzzle revisited - A panel data study from Denmark

The world population is ageing, and as lifestyle related illnesses and multi-morbidity increase with ageing, prevention with modifiable factors is becoming an increasingly important issue. In the current paper, we revisit the retirement (food) consumption puzzle in a welfare state context and examine how retirement affects food expenditure and energy intake as well as the dietary healthiness of elderly individuals with different marital and labor market status. We use a unique household panel data set covering the period from 2007–2017 with monthly food purchases from a sample of households above 55 years of age. We supplement the purchase data with official register data on income, health-contact days, unemployment, early voluntary and old age retirement at the individual level. The structure of the data set facilitates the identification of any associations between retirement and dietary behavior while controlling for important confounding factors such as the number of health-contact days as a proxy for health shocks and income as a proxy for wealth shocks. We compare the results with the results from estimations using instruments for the retirement decision. We do not find any evidence to support a retirement (food) consumption puzzle. Generally, the healthiness of diets increases at the point of retirement, and even more so for those who had the most unhealthy diets before retirement. Since the diets of individuals outside the labor market are less healthy both before and after retirement compared to other groups, the focus of dietary policy should be directed at this group.

Optimal asset allocation, consumption and retirement time with the variation in habitual persistence

In this paper, we study the individual's optimal asset allocation, consumption and retirement time under habitual persistence. To depict the phenomenon that the individual feels equally satisfied with a lower habitual level and is more reluctant to change the habitual level after retirement, we assume that both the level and the sensitivity of the habitual consumption decline at the time of retirement. We establish the concise form of the habitual evolutions, and obtain the optimal retirement time and consumption policy based on martingale and duality methods. The optimal consumption experiences a sharp decline at retirement, but the excess consumption raises because of the reduced sensitivity of the habitual level. This result is consistent with the evidence observed in the “retirement consumption puzzle”. Particularly, the optimal retirement and consumption policies are balanced between the wealth effect and the habitual effect. Larger wealth increases consumption, and larger growth inertia (sensitivity) of the habitual level decreases consumption and brings forward the retirement time.

Horizon effect on optimal retirement decision

We study an optimal consumption, investment, life insurance, and retirement decision of an economic agent who has an option to retire early any time before the mandatory retirement date. We conduct a thorough theoretical analysis for the optimal retirement problem with general utility function in the presence of a mandatory retirement date, which leads to the optimal stopping problem in finite horizon. Furthermore, the different marginal utility of consumption before and after retirement is considered, which can provide an explanation for the retirement-consumption puzzle, while it makes the problem technically more challenging. Based on the theory of partial differential equation, we analyze the variational inequality arising from the dual problem and establish the duality theorem. We show that the optimal retirement decision is determined by the time-varying optimal retirement wealth boundary, and we provide an integral equation representation for the optimal retirement wealth boundary, which can be solved accurately and efficiently by using recursive integration method. As an extension, the case with stochastic labor income is also considered. The properties of the optimal strategies are provided with emphasis on the role of the mandatory retirement date and the impact of having a retirement option on the optimal financial decisions.

Horizon effect on optimal retirement decision

We study an optimal consumption, investment, life insurance, and retirement decision of an economic agent who has an option to retire early any time before the mandatory retirement date. We conduct a thorough theoretical analysis for the optimal retirement problem with general utility function in the presence of mandatory retirement date, which leads to the optimal stopping problem in finite horizon. Furthermore, different marginal utility of consumption before and after retirement is considered, which can provide an explanation for the retirement-consumption puzzle, while it makes the problem technically more challenging. Based on the theory of partial differential equation, we analyze the variational inequality arising from the dual problem and establish the duality theorem. We show that the optimal retirement decision is determined by the time-varying optimal retirement wealth boundary, and we provide an integral equation representation for the optimal retirement wealth boundary, which can be solved accurately and efficiently by using recursive integration method. As an extension, the case with stochastic labor income is also considered. The properties of the optimal strategies are provided with emphasis on the role of the mandatory retirement date and the impact of having a retirement option on the optimal financial decisions.

Dynamic asset allocation with consumption ratcheting post retirement

Abstract In this paper, we propose a model for optimal consumption/investment and retirement that considers post retirement consumption ratcheting. Specifically, we study a model in which an economic agent has a retirement option and does not tolerate a decline in consumption post retirement. The agent receives a constant labor income but suffers utility loss from the labor before retirement. By considering variational inequality arising from the optimal stopping problem, we derive a closed-form solution for the optimal policies and retirement wealth threshold. We show that this post-retirement spending power raises the optimal retirement wealth threshold, forcing the agent to retire later. By endogenously deriving the initial consumption process at the moment of retirement time, we show that the agent’s consumption flow jumps down at the moment of retirement, which is related to the ``retirement-consumption puzzle''. Moreover, we find that the agent tends to take less risk during his entire lifespan.

Retirement Consumption Puzzle in Malaysia: Evidence from Bayesian Quantile Regression Model

The objective of this study is to use the Bayesian quantile regression for studying the retirement consumption puzzle, which is defined as the drop in consumption upon retirement, using the cross-sectional data of the Malaysian Household Expenditure Survey (HES) 2009/2010. Three different measures of consumption, namely, total expenditure, work-related expenditure, and nonwork-related expenditure, are suggested for studying the retirement consumption puzzle. The results show that the drop in consumption upon retirement is significant and has a regressive distributional effect as indicated by larger drops at lower percentiles and smaller drops at higher percentiles. The smaller drops among higher consumption retirees (or higher income retirees) may imply that they have more savings and/or retirement benefits than the smaller consumption retirees (or lower income retirees). Comparison between the three types of consumption shows that the work-related expenditure has a uniform drop across the distribution. The drop under the nonwork-related expenditure varies across the distribution, implying that it is the source behind the variation of the consumption drop.

Is there a retirement consumption puzzle in Japan? Evidence from a household panel dataset spanning several years

ABSTRACTUsing a unique long-run panel of Japanese households, this paper examines the changes in consumption at retirement (‘the retirement-consumption puzzle’). Our analysis shows that households’ expenditure does decline after the retirement of the household head and that changes in household composition at retirement cannot fully account for this decline. Changes in life-style/preferences after retirement also do not appear to explain a salient feature of the expenditure decline, namely, the strong correlation between the magnitudes of the expenditure decline and the income decline upon retirement. On the other hand, our finding that the expenditure decline is larger for households with smaller savings and/or that experienced a large unexpected income decline is broadly consistent with the standard LC/PIH augmented with unexpected shocks, while it does not rule out the possibility that there is a relatively small subset of households that are myopic and lack sufficient saving discipline.

THE RETIREMENT CONSUMPTION PUZZLE: EVIDENCES FOR BRAZIL AND THE STATE OF RIO GRANDE DO SUL

The life cycle/permanent income theories predict that consumption would be constant over time but such result has been challenged by some empirical studies which show a systemic decrease in consumption at retirement. This paper aims to investigate the so-called retirement consumption puzzle for Brazil and the State of Rio Grande do Sul. We estimated consumption functions controlling age effects for 12 composite goods using information from the 2008-2009 Household Budget Survey. The results showed that households’ expenditures systematic decrease with age for 7 composite goods (food, clothing, transport, hygiene, education, recreation and miscellaneous) and increase with age for 2 composite good (health care and housing). The patterns found to the households’ expenditures by age structure brings evidence of retirement consumption puzzle in Brazil.

Understanding the retirement-consumption puzzle through the lens of food consumption-fuzzy regression-discontinuity evidence from urban China

This paper provides an understanding of the widely-documented retirement-consumption puzzle from the perspective of food consumption. Exploiting the mandatory retirement age cut-off for public-sector male employees in urban China to obtain a source of exogenous variation in their retirement status, this paper identifies the causal impacts of retirement on four major aspects of their food consumption: food expenditure, time spent in food acquisition, the quantity and quality of food consumed. Based on data from the China Health and Nutrition Survey, our fuzzy regression-discontinuity analysis finds that, consistent with the retirement-consumption puzzle, retirement reduces elderly males’ total food expenditure by 49–55%. However, retirement barely changes the quantity of food they consume (measured by total calorie intakes). Further analysis suggests that elderly males substitute time for money in food acquisition upon retirement, which helps to reconcile the differential impacts of retirement on food expenditure and food consumption. Finally, retirement greatly changes elderly males’ diet structure. They consume significantly less food with animal origins (and thus less fat and protein) and more grains (and thus more carbohydrate) upon retirement, which undermines their diet balance by the standards provided by the Chinese Nutrition Association.

Dietary quality among the elderly in Germany: a retirement-nutrition puzzle?

We test the hypothesis of a retirement-nutrition puzzle with data from the German National Nutrition Survey II, starting from the economic debate on whether a retirement-consumption puzzle actually exists. The major question is whether unexpected income changes following retirement cause a reduced consumption of nutrients and/or a lower dietary quality. Three indices of dietary quality are computed for 6,504 individuals in the 50+ generation. Descriptive and inductive statistics are used first to compare retired and working people with regard to the consumption of foods and nutrients as well as their dietary quality. Then, multiple regression models are utilized in order to analyse the influence of retirement on dietary quality under ceteris-paribus conditions. The empirical findings do not support the hypothesis of a retirement-nutrition puzzle. Although retired people consume fewer nutrients than their working counterparts, their dietary quality is not worse. When income and age effects are controlled in a multivariate analysis, none of the three dietary quality indicators is significantly affected by retirement. The multivariate analysis reveals highly significant influences of other sociodemographic and personal characteristics on dietary quality within the 50+ generation. The analysis suggests there is no general need to target nutrition policy at a retirement-nutrition puzzle. However, pensioners are a very diverse group, and it remains a task for future research to disaggregate the findings for different clusters of retired persons.

Risks in Advanced Age

• This paper reviews both published and emerging research on different risks retirees face and possible solutions financial planners can use to help clients overcome behavioral hurdles. • Risk assessment questions that measure loss aversion, as well as reducing myopic behavior, can help keep clients in portfolios that align with their preferences. • A preference for certainty has been observed in advanced age and older defined contribution investors exhibit equity-varying risk aversion, so client risk preferences should be reassessed later in life. • Clients face declining cognitive abilities over time that correspond with a decrease in investment performance and financial literacy skills. • There is in inclination for older people to reject evidence of declining skills, but if financial planners make clients aware of their declining cognitive and financial literacy abilities before retirement they may be more willing to choose simplified and satisfactory solutions. • A retirement consumption puzzle has been observed as wealthy individuals do not decumulate portfolio assets efficiently during retirement and therefore retirement income models may be overstating retirement living expenses. • Wealthy people are living significantly longer than their less wealthy counterparts, creating the need for retirement assets to last for an extended period. • Longevity “insurance” can be an effective way to help clients spend more during their early retirement years, while also protecting them against the tail risk of running out of money prior to death. However, conflicts of interest within adviser compensation models may hinder the demand for longevity insurance. • A financial plan that includes ways the adviser and client can work together to overcome inevitable risks in advanced age should improve the likelihood of helping clients achieve both their financial and life goals.

Leisure and Housing Consumption after Retirement: New Evidence on the Life-Cycle Hypothesis

We revisit the alleged retirement consumption puzzle. According to the life-cycle theory, foreseeable income reductions such as those around retirement should not affect consumption. However, we first recall that given higher leisure endowments after retirement, the theory does predict a fall of total market consumption expenditures. In order not to mistake this predicted drop for a puzzle we focus on housing consumption which can be plausibly regarded as complementary to leisure, and we control for the leisure change in our empirical specifications, using micro data for Germany (SOEP), where housing expenditures are observable as rents for the majority (60%), as well as dwelling relocations. We still find significant negative impacts of the retirement status on housing consumption, which is hard to reconcile with the life-cycle theory. For retirees we also find significant effects of the income reduction at retirement on housing. However, the effects are small in quantitative terms, given the lock-in nature of past housing decisions.

The retirement consumption puzzle revisited: Evidence from the mandatory retirement policy in China

Using data from China's Urban Household Survey and exploiting China's mandatory retirement policy, we use the regression discontinuity approach to estimate the impact of retirement on household expenditures. Retirement reduces total non-durable expenditures by 19%. Among the categories of non-durable expenditures, retirement reduces work-related expenditures and expenditures on food consumed at home but has an insignificant effect on expenditures on entertainment. After excluding these three components, retirement does not have an effect on the remaining non-durable expenditures. It suggests that the retirement consumption puzzle might not be a puzzle if an extended life-cycle model with home production is considered.

The Retirement Consumption Puzzle in China

Using data from China's Urban Household Survey and exploiting China's mandatory retirement policy, we use the regression discontinuity approach to estimate the impact of retirement on household expenditures. Retirement reduces total non-durable expenditures by 20 percent. Among the categories of non-durable expenditures, retirement reduces work-related expenditures and expenditures on food consumed at home but has an insignificant effect on entertainment expenditures. After excluding these three components, retirement does not have an effect on the remaining non-durable expenditures. It suggests that the retirement consumption puzzle might not be a puzzle if a life-cycle model with home production is considered.

The Retirement-Consumption Puzzle and Unretirement

Using a panel sample of older Americans I investigate the drop in consumption at retirement, i.e. the so-called retirement-consumption puzzle, by taking into account that individuals may re-enter the labor force after being retired. In contrast with previous studies I look at how household consumption responds to the changes in both males’ and females’ labor market status. This paper has two important findings. Firstly, the unretirement decision is mainly determined by pre-retirement expectations of work and financial factors such as the amount of individuals’ accumulated savings at the time of retirement and having an occupational pension plan. Secondly, in a model where retirement and unretirement are instrumented with individuals’ retirement expectations, consumption does not respond to retirement or unretirement in line with the predictions of the life-cycle model. Overall, the findings of this paper suggest that individuals are able to smooth their consumption around retirement.