Adjustable consumption model for retirees to balance spending and risk

TitleAdjustable consumption model for retirees to balance spending and risk
Publication TypeJournal Article
Year of Publication2022
AuthorsCobb, BR, Murray, T, Smith, JS
JournalJournal of Economics and Finance
Keywordsconsumption, Monte Carlo simulation, Retirement, Social Security

A retirement consumption strategy that suggests initial consumption and a consumption adjustment factor that adapts spending to returns in the retiree’s investment portfolio while considering appropriate risk tolerance is introduced. This approach allows households to increase their spending earlier in retirement as compared to constant real consumption strategies while still achieving a bequest motive and maintaining investment liquidity. Failure in the model is defined as living only on Social Security payments, and this risk is not significantly increased by employing the adjustable consumption model. Consumption and wealth patterns throughout retirement tend to follow empirical data from the Health and Retirement Study. Results for retirees at varying levels of accumulated wealth, Social Security income level, and risk level are provided.

Citation Key12309