| Abstract |
- Research suggests some households underspend in retirement, resulting in a "retirement consumption gap." This paper explores this effect, specifically during the first 10 years of retirement, and incorporates both household assets and preretirement spending using data from the Health and Retirement Study. * Only 18 percent of households have enough wealth to cover pre-retirement consumption when they retire, which suggests most households will not be able to maintain their pre-retirement lifestyle in retirement-a finding consistent with other general estimates of the retirement readiness of Americans. * Real financial assets decline for 65 percent of households during the first 10 years of retirement, with a median real decline of 35 percent. * Real retiree spending declines for 75 percent of households during the first 10 years of retirement, with a median annual decline of approximately 2 percent per year. This suggests financial planners should consider changes in retirement spending that are less than inflation as part of a retirement plan. The percentage of households that can fund their retirement consumption increases dramatically during the first 10 years of retirement, from 18 percent to 48 percent, primarily due to reductions in spending. This suggests households "right-size" their spending early in retirement to better align with available resources. It is not clear, though, to what extent this behavior persists further into retirement (due to data limitations). Many well-funded households could increase consumption, but appear not to do so (i.e., exhibit a retirement consumption gap). Potential reasons include the desire to leave a bequest, uncertain medical expenses (especially late in retirement), uncertain life expectancy, etc. While this group is a minority of retiree households, understanding what drives this behavior is especially important to financial planners since this group tends to have the most accumulated wealth and are, therefore, more likely to seek the services of, or use, a financial planner.
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