The Retirement-Consumption Puzzle

Seminar paper from the year 2011 in the subject Business economics - Investment and Finance grade: 10 University of Mannheim course: Seminar in Bankbetriebslehre und Behavioral Finance language: English abstract: The literature on consumption behavior finds that households consistently reduce consumption at retirement. It documents a consumption dip of between seven and 17% on average. However according to life cycle theory households smooth marginal utility ofconsumption across time periods. The discrepancy between the predictions of theory and empirical findings is known as the retirement-consumption puzzle. A deeper knowledge on retirement saving behavior is of interest for at least three reasons. First it facilitates the testing of theoretical models like the life cycle hypothesis. Thereby it helps to understand if and by how far individuals plan their retirement in a rational manner. Second... [...]The task of this paper is to assess both theory and empirical evidence of the retirement consumption puzzle. It therefore discusses the basic characteristics of standard life cycle theory in section 2. Section 3 examines the main determinants of the puzzle andperspectives from which the puzzle has been investigated. Section 4 concludes.