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Adjustable consumption model for retirees to balance spending and risk

Author

Listed:
  • Barry R. Cobb

    (Department of Economics, Business, Virginia Military Institute)

  • Tim Murray

    (Department of Economics, Business, Virginia Military Institute)

  • Jeffrey S. Smith

    (Department of Economics, Business, Virginia Military Institute)

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.

Suggested Citation

  • Barry R. Cobb & Tim Murray & Jeffrey S. Smith, 2022. "Adjustable consumption model for retirees to balance spending and risk," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 46(2), pages 420-451, April.
    • Handle: RePEc:spr:jecfin:v:46:y:2022:i:2:d:10.1007_s12197-022-09572-0
    DOI: 10.1007/s12197-022-09572-0
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    References listed on IDEAS

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    More about this item

    Keywords

    Consumption; Monte Carlo simulation; Retirement; Social Security;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G50 - Financial Economics - - Household Finance - - - General
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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