Stock Market Fluctuations and Retirement Decisions

The net effect of a deep recession and a falling stock market may be an overall increase in retirements.

The recent decline in stock market values will have only a muted impact on the retirement of the average early baby boomer, according to NBER Research Associate Alan Gustman and his co-authors Thomas Steinmeier and Nahid Tabatabai. In What the Stock Market Decline Means for the Financial Security and Retirement Choices of the Near-Retirement Population (NBER Working Paper No. 15435), they explain that with only around 15 percent of the wealth of workers aged 53 to 58 in stocks, they aren�t 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.

The pension wealth of this group is far more dependent on traditional pensions, called defined benefit plans, than on 401(k)s or defined contribution plans, which often are heavily reliant on stock market performance. The simulations in this study suggest that the declines in the stock market will only cause early boomers to postpone retirement by an average of 1.5 months. The drop in housing prices is also unlikely to greatly affect their retirement plans.

"For most of those approaching retirement age, while losing several percentage points of this total is certainly a significant average loss -- and is of greater significance for those who are more exposed to the stock market and will experience even larger losses -- these losses will not be life-changing," the authors conclude.

Early boomers might seem to be especially vulnerable to the twin declines in stock and housing markets, since they have little time to recover before reaching retirement age. A 2006 survey of nearly 2,500 households in which at least one member was 53 to 58, conducted as part of the Health and Retirement Study, found that these households had an average of $766,945 in total wealth. But Social Security was their single largest asset, representing 26 percent of total wealth on average. Pensions were the second largest source of wealth: 23 percent on average. Home equity averaged 22 percent. Stocks in defined contribution plans and held directly accounted for only $116,535, or about 15 percent of the total.

To estimate the effect of stock market declines on retirement, this study looks at the last stock-market plunge: the bursting of the dot com bubble in the early 2000s. It concludes 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," the authors write. "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. Almost all of the rest had positive equity. Mortgages represented 39 percent of their home values on average, leaving only a tiny sliver of early boomers "1.7 percent" with negative home equity in 2006. If housing prices were to fall 20 percent, only 6.4 percent of the households in this age group would be "under water," according to the study. Typically, it will be many years before these boomers sell their homes to capture the equity in them.

The study points 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.

-- Laurent Belsie