PensionReforms' summary and comments
Knowing how much you want to live on in retirement and when you want to spend that over the two to three decades involved would be very helpful.  The net present value of all those amounts, allowing for any other state or public pensions would be your retirement savings target.  'Knowing' that for an individual is virtually impossible but 'knowing' (or estimating) that for whole populations is a little easier and should be of interest to those with an interest in public policy.  This normally needs complex models that gather all the available data and tries to guess what happens to people once careers end and dependencies begin.

This 2008 report draws together a number of papers that look at the position of workers as they move through the process of retirement.

"Up until recently, there was a view that consumption was not modeled well by standard lifecycle models as households transition into retirement. The basis of this claim was that even though retirement - for most households - is fairly predictable, consumption expenditures declined precipitously for nearly all households as they exited the labor force. Such a phenomenon had been referred to as the "retirement consumption puzzle"."

Whenever data presents unexpected or seemingly irrational results for large groups, there is often a reason that turns the unexpected into the rational.  In this case, the seeming flaw in the life cycle model turns out to be consistent with observed behaviour.

"Aggregating results across a variety of recent research shows that the fall in expenditures at the time of retirement for the average household is confined to only two consumption categories: 1) work related expenses and 2) food.  The decline in work related expenses is completely consistent with a lifecycle model of consumption where some consumption categories are complements with working.  The real puzzle should have been cast as why food expenditures fall sharply despite the fact that the rest of the household's consumption bundle remained relatively constant through the retirement period."

In fact, what seems to happen is that retired households spend more time ".engaging in "food production" (preparing meals, shopping more efficiently, etc.), [that] reduce[s] the cost of their food bundle while keeping their food consumption relatively constant.  There is strong support for such a model across a variety of data sources.  The most significant finding shows no change in actual food consumption (as measured by the quantity and quality of their actual diets) as households transition to retirement (despite sharply falling expenditures).  The reason that food falls in retirement relative to the consumption of all goods is that food, of all the consumption categories, is the most amenable to home production."

While that more comforting explanation covers most retirees, there is the group at the bottom that fares less well:
".some households experience real declines in expenditures (and well being) at the time of retirement.  For example, there is evidence that households in the bottom quartile of the pre-retirement wealth distribution experience declines in food expenditures that are nearly three times as large as the median households.  What causes these large declines for such households with low pre-retirement wealth?  There is evidence that involuntary retirements due to health shocks can explain much of this variation."

There is also some evidence that households in the bottom end of wealth distribution are not as good at planning for their retirement as others.  PensionReforms has already looked at a report here and here that suggest this group is probably less than 20% of the retiring populations.

"In summary, there is some evidence that a small subset of households may be ill-prepared to sustain their consumption through retirement.  However, the standard lifecycle model augmented with home production and idiosyncratic health shocks can explain the retirement consumption behavior for the overwhelming majority of households."

The report noted that this may change with improving mortality; also that the work was focused at the years around retirement.  Also, it would be helpful to see what happened to retirees at the other end of their retirement.

PensionReforms notes that, again, American retirees seem generally to be doing the right thing about their retirement income provisions.  Things may change but not just for the worse.  More older people are working after State Pension Ages, even though those are increasing in many countries.  Even the increasing retirement ages are allowing older workers more time to save for retirement, and adding to economic output on which the whole pension edifice (public and private) depends.

The resolution to the apparent retirement consumption puzzle shows the value of longitudinal data sets.  Hopefully, the US results will stimulate similar research in other countries that have such data sets. (File size 95KB; 32 pp)  365