The Causes and Effects of an Early Retirement

Over a third of all American workers retire earlier than planned, and do so for various reasons that can relate to health, employment, family and finances, but these kinds of shocks still only comprise only a quarter of recorded early retirements. This indicates that other factors are at play, according to a new research brief released by the Center for Retirement Research (CRR) at Boston College.

While data indicates that a greater share of American workers expect to work beyond the age of 65 to fully fund their retirement – with the rate of that expectation rising from 16 percent in 1991 to 48 percent in 2018 – data from the Health and Retirement Study (HRS) indicates that as much as 37 percent of workers retire earlier than planned, whether by being forced into it by their own circumstances or electing to retire earlier than originally anticipated.

In an attempt to explain this, Boston College researchers Alicia H. Munnell, Matthew S. Rutledge and Geoffrey T. Sanzenbacher tried to define which unexpected changes, or “shocks” as they’re referred to in the brief, are most likely to interfere with and force change on a worker’s retirement plans.

Researchers’ first task included measuring what early retirement looks like, and they found that typical traits associated with many early retirees included changes in health and marital status, or an increasing prevalence of employer buyout offers. The brief says, however, that it’s not easy to determine any particularly overriding cause of early retirement since, “no study to date has examined all of the factors together, making it difficult to say which one matters the most,” the brief reads.

The study used data from the HRS collected between 1992 and 2012. A sample consisted of individuals who gave an interview in a slot closest to their 58th birthday, an age when retirement plans should be coming into greater focus. Using these resources, researchers controlled for various individual respondent factors in order to reach their conclusions about the primary scenarios impacting the taking of an early retirement.

In terms of health, both conditions a respondent had at the time they shared their retirement plans and conditions that suddenly started affecting them had only minor differences in impacts on ultimate actions. For those who report an existing health issue, there is a “3.3-percentage-point increase in early retirement, as people seem to be surprised by how fast their ability to work deteriorates,” the brief says.

For those who report a newly emerging health condition, the brief notes that “each additional condition an individual gets is associated with a 2.2-percentage-point increase in the probability of retiring earlier than planned.” Conversely, switching jobs voluntarily correlates to a 6.8-percentage-point decrease in a person’s early retirement probability.

Among the examined “shocks,” however, the researchers conclude that those related to health likely play the biggest part in an early retirement. This is true, “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 brief says.

Job loss is also an important factor, though this is mitigated for those who manage to find new work, allowing those who move into a new job to retire as they originally planned. For those who fail to find new work, however, the research illustrates a result of discouragement and, ultimately, an early retirement that extends from that feeling.

While the researchers label financial shocks as “somewhat common,” their effects on early retirement rates do not appear to be statistically significant enough to drive the rates in either a higher or lower direction. Ultimately, these researchers state a belief that more academic study on this topic is required, since factors in this research specifically only succeed in explaining roughly one quarter of reported early retirement scenarios.

For more detailed information and full source substantiation, read the full brief.

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