Retirement Security and the Stock Market Crash: What Are the Possible Outcomes?

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This paper simulates the effect of the 2008 stock market crash on retirement incomes of current and future retirees under assumptions about future stock market performance and individuals’ labor market and portfolio behavior.nLate boomers (born 1961-65) fare better than pre-boomers (born 1941-45) because they had less wealth to lose when the market crashed and more years to restore lost wealth before retirement. If the market rebounds to its previous path, late and middle (born 1951-55) boomers’ retirement incomes could increase, but pre-boomers’ incomes would decline. If stock prices remain depressed as after the 1974 crash, however, all cohorts will lose – 20 percent of pre-boomers and 22 percent of late boomers would see their retirement incomes drop 10 percent or more. High socioeconomic groups will be the biggest winners and losers because they are more likely than low socioeconomic groups to have investments in equities. nBehavioral responses could change outcomes. Losses would be smaller for people who work more. If those with market losses delay retiring one year, the share of big losers at age 67 would decline from 22 to 14 percent for late boomers under the scenario where stock prices remain depressed. Because most pre-boomers were already retired, however, their share of big losers would decline only slightly from 20 to 19 percent. How individuals adjust their portfolios when stock prices change could also affect outcomes, but we find that dropping an assumption that investors rebalance their investment portfolios annually has little effect on simulated retirement incomes.