Is There a Retirement-Consumption Puzzle? Evidence Using Subjective Retirement Expectations

Abstract—Previous research finds a systematic decrease in consumption at retirement, a finding that is inconsistent with the life cycle/permanent income hypothesis if retirement is an expected event. In this paper, we use workers ’ subjective beliefs about their retirement dates as an instrument for retirement. After demonstrating that subjective retirement expectations are strong predictors of subsequent retirement decisions, we still find a consumption decline at retirement for workers who retire when expected. However, our estimates of this consumption fall are about a third less than those found when we instead rely on the instrumental variables strategy used in prior studies. Old age is the most unexpected of all things that happen to a man. —Leon Trotsky (1879–1940)1 I