Health shocks and retirement: The impact of the unexpected

Feiya Shao, winner of the 2015 George Katona Economic Behavior Research Award, is examining the impact of sudden health downturns on retirement.

Health is a central factor in many people’s decisions about when to retire. Chances are we all know someone who has run calculations in their head—or on paper—about how many “good” years they have left, and on how they want to spend them.

But what happens when health unexpectedly goes downhill? How does a health shock affect retirement, and what impact might that have down the road? Feiya Shao, a 5th-year doctoral student in economics at the University of Michigan, is trying to answer these questions by analyzing data from the Health and Retirement Study (HRS), conducted at the Institute for Social Research since 1992.

Feiya Shao with her dogs in a forest.

Feiya Shao with her dogs. Photo courtesy of Feiya Shao.

HRS provides an ideal way to dig into this problem, Shao says. Every other year, the nationwide study collects a wealth of information about the health of older Americans, asking participants to rate their own health as well as collecting more objective measures of actual health.

The study also asks questions regarding anticipated health. In the 2006 and 2008 HRS, respondents were asked to assess the likelihood of one of two situations: that they would be in better health in four years, or in worse. (Respondents answered one version of the question in each survey wave.)

Now, with the data from the 2010 and 2012 HRS available, Shao is able to compare respondents’ actual health with what they predicted four years earlier. And she can also see who retired and who didn’t. “I’m studying how health changes that you expect versus health changes that you don’t expect affect retirement differently,” Shao explains.

Shao’s preliminary results suggest that people are more affected by unanticipated changes than anticipated changes. So, for example, a person who experienced some kind of health shock would be more likely to retire precipitously than someone who expected their health to decline and planned accordingly.

This first stage of research is fairly theoretical, Shao says. But she hopes her research may eventually help identify those people who are most likely to have to adjust their retirement plans because of unanticipated shocks—perhaps increasing the likelihood that they could better prepare for these kinds of events. “When people have to retire unexpectedly, they end up with dramatically less wealth,” she says, “because they have less time to save. It could have a huge impact on their quality of life just because they retired three years earlier.”

Health shocks and retirement: The impact of the unexpected