Risky Retirement: The Impact of Retirement on Physical Health

Posted: 4 Feb 2019

Date Written: February 4, 2019

Abstract

Objective: Early retirement is a popular goal for many clients of financial planners. But are clients considering the implications of this decision and how it will impact their health later? The purpose of this research is to estimate the effect of retirement on physical health. Having a clearer understanding of this relationship should give workers insight into the ideal retirement age.

Significance: Theory suggests that workers demand good health in order to supply themselves with financial capital and have the opportunity for advancement in their careers (Grossman 1972). Grossman also suggests that retires will continue to demand good health in retirement and have more time and resources to invest. This may not be the case however. This study will revisit the work of Grossman using eighteen years of panel data.

Literature Review: Research into the effects of retirement on physical health is mixed. Some find no relationship between retirement and health (Ekerdt et al. 1983 & Mein et al. 2003). Other studies have found a positive relationship between retirement and health (Van Zon et al. 2016; Neuman, 2008; Mazzonna et al., 2017). Recently, with the inclusion of more complex modeling techniques and increased computing power, researchers have found a negative relationship between retirement and health (Dave et al. 2008; Cavo et al., 2013; and Rhee et al., 2016). More research is needed to clarify the true relationship.

Data and Methods: This study uses data from the 1994-2012 Health and Retirement Study. A random-effects, ordered-probit model is estimated to determine how retirement impacts physical health. Mobility, large muscle function, fine motor skills, and activities of daily living are all included as dependent variables used to measure health using latent variables. The explanatory variables include retirement, age, wealth, and a dummy variable used to determine if the participant was ill during the time of survey.

Results and Conclusion: Results from the study suggest that retirement impacts physical health negatively. Retirement is shown to reduce the probability of experiencing no difficulty with the included health outcomes. Retirement also is associated with an increased probability of experiencing multiple difficulties with physical health. Significant results are found across each of the included health outcomes. Significant relationships also are found between age and health as well as income and health, although these results are not economically significant. This implies that retirement has more influence on health than age or wealth. The relationship between retirement and health is contrary to what is hypothesized in popular theory, which implies that retirees have different preferences than workers or demand health capital differently than workers (Grossman1972). Results suggest that a theory of change may be in order.

Implications: Clients may wish to reconsider the importance of early retirement goals, especially if quality of health during retirement is a consideration. Working appears to slow the rate of the depreciation of health, which leads to less difficulty with health. Early retirement seems to speed the rate of depreciation of health which leads to increased chances of experiencing poor health. Failing to invest in health capital early on also appears to compound health difficulties as an individual nears the retirement age. Early investment in health capital may be key for good health in retirement. Working part-time in retirement may be a compromise for clients who are committed to early retirement. Additional research is needed to determine the effect of working part-time through retirement and to estimate the added utility from extended life.

Suggested Citation

Crouch, Christopher, Risky Retirement: The Impact of Retirement on Physical Health (February 4, 2019). 2019 Academic Research Colloquium for Financial Planning and Related Disciplines. Available at SSRN: https://ssrn.com/abstract=3328875

Christopher Crouch (Contact Author)

Independent ( email )

No Address Available

Register to save articles to
your library

Register

Paper statistics

Abstract Views
274
PlumX Metrics
!

Under construction: SSRN citations will be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information