What You Need to Know
- Consumption for the population as a whole declines over retirement, the Center for Retirement Research reports.
- Higher-wealth households that self-report excellent or very good health have a nearly flat consumption pattern.
- Wealth and health are important determinants of consumption paths in retirement.
Financial planners and researchers often assume that retirees prefer steady consumption as they grow older. Social Security benefits, too, are based on the premise that people want steady inflation-adjusted benefits.
However, several studies focused on new retirees suggest that retired households actually consume less over time.
Whether households prefer a constant, increasing or decreasing path of consumption in retirement has important implications for an understanding of retirement adequacy, according to a report published Tuesday by the Center for Retirement Research at Boston College on the findings of a recent study that used data from two longitudinal surveys to examine the consumption behavior of retired households.
CRR researchers examined retirement consumption over longer periods and used wealth and health to separate constrained and unconstrained households in order to determine whether necessity or preferences drive any declines in consumption.
They also explored whether, within unconstrained households, those with shorter expected life spans have faster declines in their consumption preferences.
According to the results, consumption for the population as a whole declines over retirement.
However, health and wealth constraints also matter. Higher-wealth households that self-report excellent or very good health have a nearly flat consumption pattern, declining by only 0.3% a year.
By comparison, for those who start retirement with good health, consumption declines by about 1.1%, and for those with fair or poor health, it declines by 3.2%.