High stock prices accelerate retirement of older workers: The Economist

The stock market boom appears to be spurring a wave of retirements.

Government data shows workers over the age of 55 are leaving the workforce at a rapid rate, a trend that coincides with excitement over artificial intelligence inflating stock assets.

Economists say part of the surge in retirement among these workers is due to a “wealth effect,” in which workers closer to traditional retirement age feel rich enough to swell their stock portfolios and eventually quit their 9-to-5 jobs.

Economists at Bank of America called this trend an “equity-fueled retirement party” in a research note last month.

“Labor participation rates among older workers are collapsing,” write economists Stephen Juneau and Aditya Barbu. “We believe that the strength of the stock market is partly to blame.”

Economists say the departure of older workers has helped keep unemployment rates relatively low in recent years. Their departures will help create space for job seekers and new entrants to the labor market, a key element in an otherwise frozen job market, they said.

But if the AI ​​optimism fades and the stock market worsens, it could spell bad news for recent retirees, the U.S. labor market and the economy, economists say.

The labor force includes people who have jobs and unemployed people who are looking for work. Labor force participation rate is the percentage of people working in the labor force.

At the beginning of the COVID-19 pandemic, participation among workers aged 55 and over initially fell sharply, but this was also true for the broader workforce.

But labor force participation among older workers “never recovered” even after the pandemic, Bank of America economists wrote. They wrote that it remained “range bound” until the summer of 2024, but “has since fallen even more significantly.”

Since August 2024, the labor force participation rate for workers age 55 and older has fallen from 38.6% to 37.2%, according to data from the Bureau of Labor Statistics.

on the other hand, S&P 500 Stock Index The company has delivered a string of double-digit returns to investors in recent years, according to data compiled by New York University finance professor Aswath Damodaran. Including dividend reinvestment, it was 26% in 2023, 25% in 2024, and 18% in 2025.

As of early Monday, the index was up about 16% since the start of 2026.

Thomas Ryan, North American economist at Capital Economics, said the resulting surge in wealth, including in retirement accounts such as 401(k) plans, likely made retirement an easier choice for many people.

Net assets of households and nonprofits increased by $12.8 trillion to $195.9 trillion in the second quarter of 2026, largely due to strong stock returns, according to Federal Reserve data. This is by far the largest quarterly increase in assets on record since the central bank began tracking the statistics in 2000, according to a CNBC analysis of Fed data.

“People are in a better position (financially) to retire early,” Ryan said.

Of course, people nearing retirement may be less likely to invest fully in stocks.

Financial advisors typically recommend moving toward a more conservative asset allocation toward and after retirement to avoid exposing your entire nest egg to stock market fluctuations.

However, a typical 65-year-old may still have a relatively high allocation to stocks, perhaps 50%, with the remainder allocated to assets such as bonds and cash. Stocks are a traditional growth engine for investment portfolios and provide a hedge against rising costs of living in retirement, which may last for decades.

“If people don’t have enough confidence that they can afford to retire, they’re not going to retire, and you’re going to see a very different story in the data,” said Michael Reid, head of U.S. economics at Royal Bank of Canada.

However, the wealth effect is not the only factor pushing down the labor force participation of older workers.

Economists say the wealth effect exacerbates broader demographic trends. A record number of people are reaching traditional retirement age, with more than 4 million baby boomers expected to turn 65 each year from 2024 to 2027.

The trend in workforce participation can also be partially attributed to early retirement packages, including those offered to federal employees by the so-called Department of Government Efficiency (DOGE) and companies such as: microsoftReed said the company offered its first-ever retirement program to U.S. workers this year.

Economists say older workers may be reluctant to exit the labor force or even try to “de-retire” if stock prices start to decline.

“What happens if the long-anticipated stock market decline happens, and we’re in an AI bubble now, and at some point it reverses?” Ryan said. “A small number of people who feel like their 401(k) is in a good position now at age 56, 57 may return to the workforce.”

Of course, the result is not a given.

Despite headwinds such as the Iran war, stocks have defied gravity.

“AI has become a powerful driver as companies spend millions on computing power, data centers, and infrastructure to support technology, manufacturing, energy, and industry,” Lisa Charette, chief investment officer at Morgan Stanley Wealth Management, wrote in a note Wednesday.

Charette said stocks have room to rise, but face pressures heading into 2027 from rising bond yields, high oil prices, policy uncertainty and tensions among low-income groups.

“The risks are becoming increasingly difficult to ignore,” she wrote.

Stock withdrawals pose a risk to retirees, especially early retirees who need to withdraw money from their stock portfolios for income. When that happens, it is known as the “benefit-risk order.” When selling investments, the sequence or sequence of gains or losses over time is important.

Taking money out of stocks that are declining in value leaves less room for growth when the market eventually recovers, making retirees more likely to run out of money in their later years.

Financial advisors say retirees typically can hedge against assets such as bonds and cash by withdrawing money from assets such as bonds and cash when the stock side of their portfolios declines sharply.

“If you plan and prepare properly, you shouldn’t have to worry too much,” Reid says.

But economists said the end of the booming retirement party could pose risks to the labor market and the economy.

Economists said delaying the retirement of older workers amid a negative wealth effect could reduce job market turnover and make it harder for the unemployed and other job seekers to land new jobs.

This could put upward pressure on the unemployment rate, which is currently relatively low by historical standards at 4.1%, economists say.