Using a panel sample of older Americans I investigate the drop in consumption at retirement, i.e. the so-called retirement-consumption puzzle, by taking into account that individuals may re-enter the labor force after being retired. In contrast with previous studies I look at how household consumption responds to the changes in both males’ and females’ labor market status. This paper has two important findings. Firstly, the unretirement decision is mainly determined by pre-retirement expectations of work and financial factors such as the amount of individuals’ accumulated savings at the time of retirement and having an occupational pension plan. Secondly, in a model where retirement and unretirement are instrumented with individuals’ retirement expectations, consumption does not respond to retirement or unretirement in line with the predictions of the life-cycle model. Overall, the findings of this paper suggest that individuals are able to smooth their consumption around retirement.
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