How Market Shocks Affect Decisions to Retire

No doubt those close to retirement age are feeling rattled by the recent stock market fluctuations. One might think they would delay retirement until the market improved.

However, two professors of economics at Wellesley College investigated the effect of stock market fluctuations on retirement decisions in the United States using data during the 2008-2009 recession and the dot-com crash of 2000–2002, and found short-term market dives do not generally slow retirements.

According to the researchers, overall, nearly six in 10 near-retirement-age households have less than $25,000 in stock assets and only one in eight have assets over $250,000.

Asset ownership and values are strongly correlated with education, so the researchers theorized that if workers respond to financial wealth shocks, the stark differences in stock ownership by education suggest that the impact of stock market returns on retirement will vary by education. They investigated whether college graduates between the ages of 55 and 70 are more sensitive to short-term (single year) stock market fluctuations when making retirement decisions than less educated individuals.

Data from the Current Population Survey, 1980–2002, and the Health and Retirement Study, 1992–2002, showed no evidence of this. The researchers reason this could be due to the small number of individuals who experienced large, unexpected wealth gains or losses during this period, or to the wealth effect being relatively small.

When the researchers revisited this question with more years of data, they found long-term market fluctuations, as measured by the percent change in the S&P 500 Index over a five- or 10-year period, affected the retirement decisions of college-educated workers ages 62 to 69—a one-standard-deviation (77 percentage point) increase in the 10-year return increases the retirement rate of college graduates by 1.5 points, or 12% relative to the mean. But, they found no statistically significant effect of short-term fluctuations on retirement behavior, nor any effect of market fluctuations on younger workers or workers with less education. 

The researchers conclude that while there are workers whose retirements are slowed or accelerated when they experience unexpected changes in stock market returns, the number of workers who experience substantial wealth shocks is relatively small and the magnitude of the aggregate retirement response is likely modest.