Wealth and Optimal Consumption of Retired Consumer

Abstract

In testing the life cycle theory of saving, the question

whether the bequest motive is a significant determinant of saving

has become a controversial issue. Someone argue that if the

wealth of the retired consumers declines at a slow rate, it is an

indication of existence of a significant bequest motive or it is

because of uncertainty of expected life span. In this paper,

optimal consumption path is calculated, and some simulated results

are presented on the time path of wealth for retired consumers.

It is shown that if wealth is measured in nominal

values, the wealth curve can take increasing and decreasing

shapes depending upon the expected life span, the rate of interest,

and the growth rate of consumption, irrespective of significance

of the bequest motive. Thus, the rate of decumulation

of nominal wealth alone cannot be used as evidence for significance

or insignificance of the bequest motive.