Why Workers Retire Earlier Than Planned

Between 1991 and 2014, the percentage of workers indicating that they planned on working past age 65 increased from 11% to 33%, but for many, these later retirement plans are not actually achieved, a research report from the Center for Retirement Research at Boston College notes.

For example, in the Health and Retirement Study’s (HRS) initial cohort, roughly 37% of those working at age 58 retired earlier than they had planned.

The report notes that past research has identified several potential causes of earlier-than-planned retirement, including poor health, changes in marital and spousal employment status, and changes in retirement wealth. Yet, because these prior studies tend to focus on at most a few of these shocks, rather than all of these factors together, which factor is most important in determining earlier-than-planned retirement is unclear.

In addition, little is known about the interaction between health deterioration and retiree health insurance, despite this issue’s importance in predicting the effect of the Affordable Care Act (ACA) on the timing of retirement. If health insurance outside of employment allows workers to respond to deteriorating health by retiring before they planned, then the ACA, by offering all employees a health insurance option outside employment, may encourage earlier-than-planned retirement.

The researchers used data from the HRS to estimate a model of early retirement and determine the relative importance of four different sets of “shocks” that may induce someone to deviate from their retirement plans.

The research found individuals who lose their jobs through a layoff or business closing are 27.6 percentage points more likely to retire early than other workers. But this result holds only for individuals who do not find re-employment. Switching jobs—regardless of whether the initial change occurred voluntarily—actually decreases the likelihood that workers retire earlier than planned. Workers who change employers are 6.8 percentage points less likely to retire earlier than planned. 

The retirement of a spouse before the worker planned to retire is correlated with a 4.2 percentage-point increase in the likelihood of retiring early. Having a parent move in has a large impact on the probability of retiring early, increasing it by approximately 12.1 percentage points. 

Individuals with pensions are less likely to retire early than other individuals. Having a defined benefit or defined contribution pension plan at one’s current job make it significantly less likely to retire earlier than planned. This result may be due to better work conditions or the desire to continue accruing benefits, the researchers say. In addition, the research found more educated workers are less likely than high school dropouts to retire early. 

Workers experiencing health shocks are significantly more likely to retire early than others, and each additional health condition a person has at their planning age is associated with a 3.3 percentage-point increase in the probability of early retirement, according to the research. Health is the most important driver of early retirement.

Workers with retiree health insurance are slightly more likely to respond to health shocks by retiring early, but because the estimate is statistically insignificant, more research is needed to establish whether the ACA will induce workers with deteriorating health to retire earlier.

The research report, “What Causes Workers to Retire Before They Plan?” may be downloaded from here.