Working paper

Does retirement lead to life satisfaction? Causal evidence from Fixed Effect Instrumental Variable models

Retirement income Community participation Retirement Ageing Financial stress Life satisfaction Australia

Retirement is a major life transition for working adults. It typically leads to changes in finances, health, social relations and time allocation, and hence in one’s satisfaction with various aspects of life. In this paper, we explore the causal impact of retirement on different domains of life satisfaction, wellbeing and happiness. While understanding the effect of retirement on personal wellbeing is clearly of interest to individuals and policy makers, there exists limited and mixed evidence on the topic. Our study provides the first empirical evidence from Australia.

This paper presents robust evidence that retirement causally improves overall life satisfaction which is subsequently explained by improvements in satisfaction with one’s financial situation, free time, health, and participation in local community activities. Furthermore, while the positive wellbeing impact of retirement is sizable initially, it fades after the first 3 years. We find that the improvements in financial satisfaction upon retirement are only observed for low-income individuals. However, the wellbeing impact of retirement does not differ by gender, educational, occupational, economic or marital backgrounds. We also explore several potential explanations for our findings.

Our findings on the impact of retirement on overall life satisfaction and various aspects of satisfaction have some potentially important methodological and policy implications. Methodologically, our results indicate that failing to adequately account for the endogeneity of retirement would result in a downward-biased estimate of a positive wellbeing impact of retirement. From a policy point of view, our finding of the differential retirement impact on financial satisfaction by income groups suggests that policies to increase retirement ages would also delay the retirement induced wellbeing improvements for many older people, especially those from a low socio-economic background. Furthermore, given our finding that the beneficial impact of retirement on wellbeing is short-lived, we recommend governments to consider broader support of organized group activities for seniors, and targeted communications about the availability of such activities to support the wellbeing of retirees, especially those who have been retired for 3 years or longer.

Publication Details
License type:
All Rights Reserved
Life Course Centre Working Paper No. 2020-10