AbstractsBusiness Management & Administration

Wealth instability and retirement: how capital market volatilities affect retirement decisions

by Steven Hancock

Institution: California State University – Sacramento
Year: 2016
Keywords: Timing; Pension; Social Security; Survival analysis; Cox proportional hazards
Posted: 02/05/2017
Record ID: 2065851
Full text PDF: http://hdl.handle.net/10211.3/171242


Retirement is an expensive proposition and wealth preservation becomes an important concern for those nearing retirement age. Using capital market volatility as a proxy, this study analyzes the potential impacts of wealth instability on the probability of retirement. The effects of two distinct notions of volatility are explored: implied volatility and historical volatility. Data are used from the Panel Study of Income Dynamics and a Cox Proportional Hazards model is implemented to estimate the retirement probabilities of 2,800 male heads-of-households over the age of 50 for the years of 1999 to 2013. This study finds that a one percentage point increase in stock market volatility leads to a 1.5 to 4.2 percent increase in retirement probability. In addition, individuals who have high exposure to equities are even more likely to retire due to increasing volatility. On the other hand, increasing Treasury yield volatility is found to delay retirement and high exposure to bonds does not have an additional effect. Thus, capital market volatilities affect retirement in opposing ways based upon asset class while non-capital market volatilities have no conclusive effect. These results may be useful for pension plan administrators or financial planners who are interested in viewing volatility risk from a different perspective. Advisors/Committee Members: Klein, Jennifer.