Heterogeneity in Household Spending and Well-being Around Retirement
We study heterogeneity in spending patterns around the time of retirement. Using rich consumption data from the Panel Study of Income Dynamics, and exploiting within-household spending variation, we systematically classify households into groups characterized by differences in consumption transitions at retirement. We decompose the overall spending changes into the contribution made by different subcomponents of consumption. We find that the households that increase their spending shift budget away from food and toward transportation, recreation, and trips. In contrast, those households for which spending falls reduce the budget share spent on transportation and food away from home, while increasing the share allocated to food at home and housing expenditures. Using a life-cycle model, we characterize the mechanisms capable of driving these observed patterns.
- For more than half of couples in a sample of U.S. couples with a retiring member, household spending displays no substantial change between the six years before retirement and the six years after retirement.
- For a fifth of couples, large increases in spending are seen on retirement, while for a fifth large falls are observed.
- Among those whose spending fell substantially, part of the decrease can be accounted for by falls in work expenses and a switch from food consumed away from home to food prepared at home. Both of these trends are expected, and are not indicative of planning failures.
- However, households in the group whose spending falls self-report difficulties planning for the future more frequently than those with stable spending, suggesting that part of the fall in consumption indicates poor financial management.
Moran, Patrick, Martin O'Connell, Cormac O’Dea, and Francesca Parodi. 2021. “Heterogeneity in Household Spending and Well-being Around Retirement.” Ann Arbor, MI. University of Michigan Retirement and Disability Research Center (MRDRC) Working Paper; MRDRC WP 2021-427. https://mrdrc.isr.umich.edu/publications/papers/pdf/wp427.pdf
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Paper IDWP 2021-427