Retirement and the Stock Market Bubble

This paper specifies and estimates a structural dynamic stochastic model of the way individuals make retirement and saving choices in an uncertain world, and applies that model to analyze the effects of the stock market bubble on retirement behavior. The model includes individual variation both in retirement preferences and in time preferences. Estimates are based on information covering the period 1992 through 2000 from the Health and Retirement Study (HRS), a panel survey of retirement age respondents and their spouses. The extraordinary returns in the stock market in the late 1990's, which more than doubled stock prices and unexpectedly increased the value of a mixed portfolio by nearly 60 percent, increased retirement for the HRS sample of workers by over 3 percentage points by the turn of the century and would have decreased the average retirement age by about a quarter of a year if it had not been interrupted. The subsequent decline in the market, which very nearly wiped out the gains that had been made during the preceding surge, effectively neutralized the effect of the preceding stock market gains on retirement. The effects of the bubble were to increase retirement as long as the bubble continued, but any continuing effects of the bubble after its end will probably be minimal