Retirement and subjective well-being

The life cycle model predicts that individuals substitute leisure for consumption when they retire. We show that the effect of retirement on various well-being measures available in the German Socio-Economic Panel (GSOEP) are compatible with this prediction: the overall effect on life satisfaction is negligible, while satisfaction with the free time increases and satisfaction with household income decreases. The life cycle model also predicts that involuntary retirement is likely to have adverse effects because individuals would actually prefer to work in order to consume more, but are prevented from doing so. We find that indeed, involuntary retirement results in an overall negative effect that can partly be explained by a bigger drop in income satisfaction and a smaller increase in satisfaction with the free time.