Background Loss of physical functioning is an early marker of declining health in older people. The objective of this study was to examine the age-related trajectories of physical functioning among those in full-time work and retirement. Methods Based on the Health and Retirement Study, participants who were working full-time or were in fulltime retirement and 65-85 years of age during the follow-up period from 1992 to 2010 were included (n=17 844, n of observations from repeated measures in full-time work 5891 and in retirement 57 117). Details of physical functioning were asked about at all study phases and 10 items related to mobility and activities of daily living were summed to obtain a physical functioning score (0-10). Results The number of physical functioning difficulties increased every 10 years by 0.17 (95% CI 0.04 to 0.29) when in full-time work and by 0.46 (95% CI 0.41 to 0.50) in retirement after adjusting for age, sex, race, education, total wealth, Body Mass Index, smoking, physical activity and number of diseases. Factors that were associated with a significantly greater increase in number of physical functioning difficulties in full-time work and retirement include lifestyle-related risks and chronic conditions. Conclusions Physical functioning declines faster in retirement than in full-time work in employees aged 65 years or older and the difference is not explained by absence of chronic diseases and lifestyle-related risks.