How Has the Financial Crisis Affected the Consumption of Retirees?

Despite the recovery of the stock market since the financial crisis, many retirees have seen significant reductions in their wealth relative to pre crisis expectations and substantial declines in investment income due to very low short-term interest rates. What really matters, though, is the impact of the crisis on retirement consumption. This brief updates a recent study which found that the crisis had little effect on the consumption of retirees with either very small or very large amounts of financial assets. In contrast, the broad middle class did suffer a drop in consumption. Some of these households invest mostly in short-term deposits while others invest in a broader range of assets. Some attempt to live off the interest and dividends, while others follow the life-cycle model and draw down their wealth during retirement. The discussion proceeds as follows. The first section describes the impact of the crisis on financial assets. The second section analyzes its impact on retirees’ wealth and income. The third section explains how the crisis affected the consumption of two illustrative types of middle-class retirees. The final section concludes that although life-cycle investors in balanced portfolios experienced relatively modest declines in consumption, the reductions for those attempting to live off the interest on short-term deposits were much greater. The results of the analysis for these specific behaviors, though, represent extremes – most people lie somewhere in between.