STOCK MARKET FLUCTUATIONS AND RETIREMENT DECISIONS
April 28, 2010
The recent decline in stock market values will have only a muted impact on the retirement of the average early baby boomer, according to a new report by the National Bureau of Economic Research.
In their paper, co-authors Alan Gustman, Thomas Steinmeier and Nahid Tabatabai explain that with only around 15 percent of the wealth of workers aged 53 to 58 in stocks, they are not likely to see a huge hit to their retirement portfolios, despite the market losing roughly a third of its value from its 2007 peak through the fall of 2009. More than a quarter of the household wealth of this group is instead concentrated in anticipated Social Security payments.
To estimate the effect of stock market declines on retirement, the researchers look at the last stock-market plunge: the bursting of the dot-com bubble in the early 2000s:
- They conclude that stock market plunges have a modest effect on older workers and change the average age of retirement by only a few months.
- In addition, these modest delays in retirement by some workers trying to make up for stock losses may be swamped by the number of early retirements caused by a lack of good jobs.
- Even if the stock market decline, taken alone, modestly decreases the number of retirements, the recession that started in 2007 may substantially increase retirement due to poor job prospects.
- Thus, the net effect of a deep recession and a falling stock market may be an overall increase in retirements.
On the housing front, the fallout from the big decline in home prices may also be muted for early boomers. Nearly half of early boomer households had no mortgage. The researchers point out that some early boomers may be affected by the combination of stock and housing declines. Those who lose a job may have to retire early or take another job that will likely pay much less. This diversity of winners and losers poses a major policy challenge for those wanting to extend government help to hard-hit early boomers.
Source: Laurent Belsie, "Stock Market Fluctuations and Retirement Decisions," NBER Digest, March 2010; based upon: Alan Gustman, Thomas Steinmeier and Nahid Tabatabai, "What the Stock Market Decline Means for the Financial Security and Retirement Choices of the Near-Retirement Population," National Bureau of Economic Research, Working Paper No. 15435, October 2009.
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