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Journal of Economics and Finance

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07-04-2022

Adjustable consumption model for retirees to balance spending and risk

Authors: Barry R. Cobb, Tim Murray, Jeffrey S. Smith

Published in: Journal of Economics and Finance | Issue 2/2022

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Abstract

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.

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Downloaded from the Federal Reserve Economic Database (https://fred.stlouisfed.org/series/PCEPI) on 5/13/2017 (Bureau of Economic Analysis 2017).

These data are largely confirmed by Ibbotson’s SBBI using the category Large-Cap stocks and Intermediate Term Government Bonds, although SBBI data for 2020 were not available at this time

It should be noted that life expectancy is not conditioned on the work decision at the given age. Our simulation only accounts for age obtained and does not adjust for other covariate factors that may affect life expectancy.

Income quintiles are constructed using data from the 2009 Current Population Survey (CPS).

The 2019 Survey of Consumer Finances reports $134,000 as the median value of retirement accounts for those between the ages of 55 - 64, while the mean value is $408,420

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Title: Adjustable consumption model for retirees to balance spending and risk
Authors: Barry R. Cobb
Tim Murray
Jeffrey S. Smith
Publication date: 07-04-2022
Publisher: Springer US
Published in: Journal of Economics and Finance / Issue 2/2022
Print ISSN: 1055-0925
Electronic ISSN: 1938-9744
DOI: https://doi.org/10.1007/s12197-022-09572-0

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