Retirees: Doing Better With Less
Personal financial plans and national retirement readiness studies typically assume that households seek to maintain a constant standard of living (i.e., after-tax spending, or consumption) throughout one’s lifetime. The idea is that any reduction in spending is problematic, or more formally, that the utility (or satisfaction) of consumption is constant over time. The lack of savings more generally for Americans has resulted in growing concerns of a potential national retirement crisis. However, the story is more nuanced.
Leveraging data from the Health and Retirement Study (HRS), I find that financial wellbeing increases markedly for older Americans holding consumption levels constant, which suggests the utility of consumption changes across the lifecycle (i.e., retirees do not need to maintain the same standard of pre-retirement consumption throughout retirement to maintain the same level of financial wellbeing, on average). For example, while only about 45% of respondents consuming between $20,000 and $30,000 per year between the ages of 50 and 54 are satisfied with their financial situation, approximately 84% of those age 80 or older consuming between $20,000 and $30,000 per year are satisfied with their financial situation (or roughly double).