The impact of life’s unexpected changes clearly play a large role in early retirement, but there also appear to be other dynamics at work, according to a new white paper.
In “Retiring Earlier Than Planned: What Matters Most?”, authors Alicia Munnell, Mathew Rutledge and Geoffrey Sanzenbacher of the Center for Retirement Research at Boston College set out to determine the impact of unexpected changes in health, employment, family and finances on early retirement, and the prevalence of these shocks.
Citing data from EBRI, the researchers note that the share of workers reporting that they expect to work past age 65 rose from 16% in 1991 to 48% in 2018. Yet such intentions often go awry, as findings from the University of Michigan’s Health and Retirement Study (HRS) indicate that 37% of workers retire earlier than planned, the paper observes.
To determine which factors play the largest role, the researchers – using HRS data collected between 1992 and 2012 – first define and quantify earlier-than-planned retirements, determine the potential types of shocks and then identify which shocks matter the most, taking into account both their potency and prevalence.
Shocks to the System
Overall, health “shocks” were found to be the most important factor in earlier-than-planned retirement.
“This analysis suggests that health likely plays the largest role in early retirement, both because people in bad initial health overestimate how long they can work and because health often worsens before the age at which they planned to retire,” the authors note.
The paper explains that individuals face two kinds of health shocks. The first occurs when existing health conditions affect one’s ability to work more than anticipated, while the second occurs when someone’s health changes between the age at which they make their plan and their planned retirement age.
The regression results indicate that several shocks have a statistically significant effect on retiring early, the paper notes. For example, for those with an existing health condition at the time they report a planned retirement age, there is a 3.3-percentage-point increase in the probability of retiring early, as people seem to be surprised by how fast their ability to work deteriorates. But each additional condition an individual gets is associated with a 2.2-percentage-point increase in the probability of retiring earlier than planned.
If everyone made their plans in perfect health and had no changes in their health, the overall share of early retirements would drop by 4.8 percentage points, from 37% to 32%.
Following health shocks were involuntary job loss and changes with the family, the paper notes.
The effect of a job loss is very dependent on the worker’s ability to find a new job, the authors explain. If a worker finds one, they are 6.6 percentage points less likely to retire early, but if they do not find one, they are 27.6 percentage points more likely to retire early. On the other hand, switching jobs voluntarily is related to a 6.8-percentage-point decrease in the probability of retiring early.
On the family side, having a spouse retire increases the probability of retiring early, and having a parent move in has a strong impact in the same direction. Interestingly, the authors note that financial shocks do not seem to play a significant role.
Yet, a key caveat is that all the shocks combined explain only about a quarter of earlier-than-planned retirements, which suggests that other factors that are harder to measure also play a role.
