The Effect of Retirement Timing on Lifestyle

John Iekel

The timing of when one leaves the workforce has a variety of effects—and a recent study examines whether, and how, it affects one’s lifestyle during retirement.
In “Retirement Consumption and Pension Design,” National Bureau of Economic Research Working Paper 31628, researchers study whether timing of retirement relates to the way one lives after retirement—which they term “consumption”—and evaluate what effect pension reforms have on distribution of retirement funds. 

The researchers—Jonas Kolsrud of the Department of Economics and Statistics Linnaeus University and National Institute of Economic Research, Stockholm; Camille Landais and Johannes Spinnewijn of the Department of Economics at the London School of Economics; and Daniel Reck of the University of Maryland Department of Economics—use consumption statistics from Sweden to assess the redistributive costs of pension reforms and consider the relative amount of benefits provided to those who retire earlier than the normal age for doing so and those who retire later than that age. 

The Findings

Kolsrud, Landais, Reck, and Spinnewijn report findings that are not unexpected. To wit, they report a sharp difference between those who retire before the “normal” retirement age and those who retire “late.” More specifically, they say that those who retire after age 65 have 20% higher consumption than those who retire before age 60.

Kolsrud, Landais, Reck, and Spinnewijn also expand their study and analysis to include an additional factor not often discussed. 

Retiring early. On average, the researchers say, those who retire earlier than the normal retirement age experience larger changes at retirement than those who do not, and they also consume less when retired. They estimate that consumption declines by almost 10% when those who are younger than age 60 retire. 

Kolsrud, Landais, Reck, and Spinnewijn do not say why that consumption is lower; i.e., whether it is attributable to lower retirement savings than they would have amassed had they worked and contributed to retirement accounts longer, or whether they generally are more frugal.  

Interestingly, the researchers report that they found that “health shocks” in the years just before retirement occur more often for those who retire early than those who do not. They do not say whether this could be a contributing factor in retiring early.

Retiring late. The researchers find that those who retire after age 65 experience little change from their pre-retirement lifestyle. They add that those who retire then have more resources, are healthier, and have a lower mortality risk. They further found that the financial effects of “shocks” on those who retire later are not as severe. 

When a career starts. Kolsrud, Landais, Reck, and Spinnewijn also discuss the effect of when a career begins. They found that those who have a long career that starts earlier in life and who have long careers by age 55 have 12% lower consumption than those whose career are medium length by age 55. 

Implications for Reform 

Kolsrud, Landais, Reck, and Spinnewijn suggest that their findings have implications for pension reforms. 

Consumption smoothing. The researchers say the finding that \people who retire younger have a larger drop in consumption when they retire and then consume less while retired than those who retire “on time” or later—when examined through a theoretical model—imply that reforms that encourage retiring later entail a significant and “pivotal” consumption-smoothing cost. 

Redistributive effects. Kolsrud, Landais, Reck, and Spinnewijn report that they found that while encouraging work late in life reallocates resources from those who are relatively needy to those who are relatively less needy, encouraging work early in life reallocates resources from those who are relatively less needy to those who are relatively needy.

The researchers further say they found that reforms that redistribute benefits based on early-career labor supply would have different results than reforms that differentiate based on wealth. They suggest that the latter might better target pension benefits toward those vulnerable to larger drops in consumption at retirement.