Retirement Expectations Formation Using the Health and Retirement Study

This paper examines how a wide array of factors (household and individual level financial, health and other taste shifter characteristics) influence retirement plans over time and how uncertainty affects the strategies that individuals use to plan their retirement years. Using panel data models we examine the role of health and economic factors on retirement planning using the Health and Retirement Study (HRS). We examine the rationality of plans for retirement controlling for sample selection. After controlling for sample selection, reporting biases, and unobserved heterogeneity we find that plans for retirement do follow the random walk hypothesis and pass tests of weak and strong rationality. These findings allow us to assume rationality and examine retirement plans using first differences. We then examine changes to those factors and the effects of new information on plans and find that new information contributes little to changes in plans. This leads us to conclude that on average people correctly form expectations over uncertain events when planning for retirement. These results have important implications for a wide variety of models in economics that assume rational behavior. Classification-JEL: J26, J22, C23,D84 Keywords: Expectations, Retirement, Panel Data with selection, rationality