The Effect of Large Capital Gains on Retirement
Michael Hurd and Monika Reti

It has typically been supposed that increases in wealth would lead to earlier retirement. It has been difficult, however, to confirm this supposition empirically. The reason for this difficulty may be that wealth is associated with other factors tending to postpone retirement. For example, wealthier people should have higher-paying jobs, and people with such jobs may like their work better than those with lower-paying jobs.

To test the connection between wealth and retirement, what is required is some unexpected trend with consequences for wealth. The big run-up in stock prices in the 1990s represents such a trend. Hurd and Reti attempt to relate changes in wealth between the 1994 and 1998 HRS waves to changes in expected probabilities of remaining employed after 62.

Changes in wealth and in expected work status did not always relate as expected. For example, between waves 3 and 4, when wealth increased by a nominal 35 percent, the expected probability of continued work stayed the same. If anything, increases in wealth were more often accompanied by increases in the expected probability of continued work.

If those who gained wealth did not devote it to moving up their retirement dates, did they spend it? Again, no consistent relationship was found between wealth gain and consumption. For example, among new entrants into stockholding between waves 3 and 4, wealth increased by 44 percent, while spending decreased by 5.6 percent. Hurd and Reti therefore concluded that the stock gains of the 1990s were saved in their entirety.

Why do people not move up their expected retirement date when they have the chance to trade work years for leisure years? It may be that the stock market gains were more widely anticipated than we now think. Or it may be that the answer lies in not-yet-understood broader relations between work and utility that may also explain recent research suggesting that lottery winners cut back on work to much less a degree than would be expected.