This paper addresses whether households save enough for their retirement. For successive date-of-birth cohorts we analyze income and expenditure patterns around the time of retirement. We find a fall in consumption as household heads retire which cannot be fully explained by a forward-looking consumption-smoothing model that accounts for expected demographic changes and mortality risk. Controlling for labor-market participation explains part, but not all, of this dip. We argue that the only way to reconcile fully the fall in consumption with the life-cycle hypothesis is with the systematic arrival of unexpected adverse information.

We investigate the possibility that limited participation in asset markets, and the stock market in particular, might explain the lack of correspondence between the sample moments of the intertemporal marginal rate of substitution and asset returns in U.K. data. We estimate ownership probabilities to separate “likely” shareholders from nonshareholders, enabling us to control for changing composition effects as well as selection into the group. We then construct estimates of the IMRS for each of these different groups and consider their time‐series properties. We find that the consumption growth of shareholders is more volatile than that of nonshareholders and more highly correlated with excess returns to shares. In particular, one cannot reject the predictions of the consumption capital asset pricing model for the group of households predicted to own both assets. This is in contrast to the failure of the model when estimated on data for all households.