'Fat' 401(k)s causing people to retire early: Oxford Economics

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The stock market’s all-time highs are doing wonders for workers’ 401(k)s, with the largest number of 401(k) and IRA millionaires in history, according to Fidelity data.

As a result, many people are dropping out of the workforce to retire earlier than planned, turning their backs on a job seeker’s market.

The Federal Reserve is letting the economy run especially hot in an attempt to bring back people into the workforce, Oxford Economics' senior economist Bob Schwartz wrote in a note to clients. But that hot economy and resulting hot market mean bigger 401(k) balances – so some workers may not feel as compelled to continue working when they check their inflated retirement accounts.

“Some of the retirees may come back if the job market is hot enough, but the muscular boost to 401(k) plans over the past year may keep a larger fraction of senior workers on the golf course than anticipated,” Schwartz wrote.

Last year, account balances increased 21% on average, largely thanks to the market’s rise, rather than contributions, Vanguard reported. The fund firm’s average and median 401(k) balances in 2020 hit $129,157 and $33,472, respectively.

Schwartz pointed out that the number of people who have retired has spiked since the pandemic began, with 2.5 million workers deciding enough is enough. Amid early pandemic layoffs, a lot of that was probably involuntary, as people cared for family members, lost their jobs. According to a May Federal Reserve report, 29% of 2020’s retirees retired due to the pandemic.

The Fed wrote that it’s likely many who retired because of Covid-19 would return to work, and now given the improved job market, there’s even more reason to go back to work.

The big question, then, is whether these two factors balance each other out. Oxford Economics says no.

“One likely reason is that ageing baby boomers are entering their golden years with considerably stronger balance sheets than they expected, thanks to surging asset prices and lower debt burdens,” Schwartz wrote, noting that household wealth increased 23% ($25.6 trillion) over the past year thanks to rising home values and ever-higher stock market.

“However, wealthy households with the fattest portfolios reaped the biggest gains, and it’s unlikely that their appreciated assets greatly affected retirement decisions,” Schwartz continued. “That said, it’s important to remember that older households hold more wealth than younger ones, and the improved balance sheets of senior workers may well have tipped them over into retirement.”

This would include even those in lower-paying jobs, which often provide access to retirement plans.

“Here the improvement over the past year has been even more remarkable. According to the Federal Reserve data, assets in defined contribution plans, mostly 401(k)s, surged by 34% over the past year, exceeding the gain in the broader measure of net worth by the widest margin in at least a decade,” Schwartz wrote.

With that big gain, according to Schwartz, “it’s not a stretch to believe that some senior workers feel they have enough to retire on a few years before their planned exit from the labor force.”

“Historically, when people retire,” he continued, “there is only a slim chance they return to work.”

Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.

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