Health Shocks Drive Many to Retire Earlier Than Planned

CRR researchers find health shocks play the largest role in causing early retirements, 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 Center for Retirement Research at Boston College (CRR) has published a new report looking into what issues commonly hold workers back from staying in the labor force beyond the age of 65.

The research brief’s authors are Alicia H. Munnell, director of the Center for Retirement Research at Boston College (CRR) and the Peter F. Drucker Professor of Management Sciences at Boston College’s Carroll School of Management; Matthew S. Rutledge, associate professor of the practice of economics at Boston College and a research fellow at the CRR; and Geoffrey T. Sanzenbacher, associate director of research at the CRR.

According to the CRR research trio, several studies have found that a deterioration in health precipitates early retirement. Other influences on early retirement include changes in marital status and the presence of employer buyout offers, they write.

“But no study to date has examined all of the factors together, making it difficult to say which one matters the most,” the brief says.

Citing data from the longitudinal Health and Retirement Study, the CRR researchers say about 37% of people retire earlier than planned. They go on to explain how people’s planned retirement ages cluster around 62, which is Social Security’s earliest eligibility age, and 65, which is Medicare’s eligibility age. Notably, the later someone plans to retire, the less likely they are to achieve their goal, according to the report.

“For example, of the 21% of people who intended to work to age 66 or later, more than half failed to reach this target,” the report says.

According to the CRR researchers, the causes or “shocks” driving earlier-than-hoped retirements can be lumped into four categories. These are health shocks, employment shocks, familial shocks and financial shocks.

“In determining which shocks matter most [from a policy perspective], two factors are important,” the report says. “First, how big is the impact of the shock on people who experience it? Second, how many people actually experience it? … To determine a shock’s impact, a regression analysis relates the occurrence of a shock to the probability of retiring early. This regression controls for other personal characteristics that might be correlated with both earlier-than-planned retirement and the occurrence of shocks.”

According to the researchers, the regression results indicate that several shocks have a statistically significant effect on retiring early. For example, health shocks matter quite a bit. Each health condition a respondent has at the time they report a planned retirement age is associated with a 3.3-percentage-point increase in early retirement, “as people seem to be surprised by how fast their ability to work deteriorates.”

On the other hand, being willing to switch jobs voluntarily is related to a 6.8-percentage-point decrease in the probability of retiring early, the report says. “The effect of a job loss is very dependent on the worker’s ability to find a new job—If they find 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 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. Financial shocks do not seem to play a significant role.”

In terms of what shocks happen most frequently, the report says the main takeaway is that changes in health are common, as are spousal retirements, marital status changes, and large swings in wealth, “which is largely because people have little wealth to begin with.”

The CRR researchers conclude 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. Job loss is also important, the report says, although the effect is mitigated by the fact that some people are able to find a new job and those people are more likely to make it to their planned age.

“Still, for those who fail to find a new job, the effect seems to be discouragement and ultimately an early retirement,” the report concludes. “With respect to family transitions, having a parent move in seems to be a large burden on people who experience it, but it is not a frequent enough occurrence to drive early retirement in the population. Finally, even though financial shocks appear somewhat common, they tend to have a small and not statistically significant effect on driving early retirement. Of course, more research in this area is needed, since the factors considered in this paper explain only about a quarter of early retirements.”

The full report can be downloaded here.