Whether households prefer a constant, increasing, or decreasing path of consumption in retirement has important implications for our understanding of retirement adequacy.
If people want steady consumption, they need more assets at retirement than if they plan to let their consumption decline over time.
Economists’ life-cycle model assumes that forward-looking retirees smooth their marginal utility of consumption over their lifespan. Under certain conditions, the model predicts that retirees would prefer constant consumption. This result is intuitive, and financial planners and researchers have often assumed that retirees would like to maintain their preretirement standard of living. In addition, Social Security benefits are based on the premise that people want steady consumption, as benefits are adjusted for inflation.
While maintaining steady consumption might…