Job and Stock Market Woes Could Linger for Retirees

The state of the economy when you stop working can impact your retirement income.

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The state of the job market and stock market in the year you retire could affect how much income you receive a decade or more into your retirement. A stock market decline in the years leading up to retirement typically causes a reduction in investment income that can still be felt 10 years later, according to new Wellesley College research. High unemployment around the time of retirement means some older workers may be pushed out of the workforce earlier than planned, which also generally reduces retirement income.

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“The economic conditions that occur in the period leading up to a worker’s retirement may affect his or her economic well being for the remainder of his life,” write economists Courtney Coile and Phillip Levine. “Initial conditions may matter a great deal.”

In years with a high unemployment rate, many older workers are forced to retire because of an inability to find a new job. Early retirement generally lowers retirement income because annual Social Security benefits are reduced for individuals who claim payments early. A 1 percent  higher unemployment rate at age 62 results in a drop in the amount of Social Security annual income retirees between the ages of 70 and 79 receive, according to the Wellesley College analysis of Census Bureau data. For an unemployed worker in the middle third of the income distribution this works out to be an average of $2,040 less in annual Social Security payments, which is a 15 percent drop in annual income.

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The state of the stock market in the years leading up to retirement can also have lasting affects for retirees. Long-term declines in stock prices when workers are in their 50s and 60s continue to result in a lower investment income for retirees ages 70 to 79. Conversely, investment income in retirement is higher when the stock market performs better in the years leading up to retirement. If S&P 500 returns are 100 percentage points higher in the five-year period when a worker is between ages 55 and 60, retirement income between ages 70 and 79 is estimated to be about 22 percent or $1,750 higher per year. A similar boost in the stock market between ages 60 and 65 results in a 13 percent or $1,100 boost in income in the retiree’s 70s. Only retirees in the top third of the income distribution have enough investment income for market conditions to affect their post-retirement income, the Wellesley College researchers found.

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“Falling stock prices harm the well being of more advantaged older workers by preventing them from retiring when they want and reducing their retirement income,” write Coile and Levine. “Rising unemployment harms the well being of less advantaged older workers by leading them to withdraw from the labor market sooner than they want and also reducing their retirement income.”