The Effect of Wealth on Retirement (Preliminary)

This paper estimates the effect of wealth on retirement. I use an instrumental variables (IV) estimation approach in which wealth is instrumented with two plausibly exogenous sources of variation. The first is geographic variation in the rate of housing price growth, and the second is unanticipated inheritance receipts. I estimate the model on older men in the Health and Retirement Study between 1996 and 2004. My results indicate that an increase in wealth leads to earlier retirement, but that the effect is small. For instance, a $100k increase in wealth reduces the probability of labor force participation by 10%. I also examine whether the effect of housing wealth on retirement is different than non-housing wealth. The willingness of the elderly to use housing wealth to finance consumption in retirement is an open question. My analysis suggests that older men are equally willing to “spend” housing and non-housing wealth on leisure.