As the Chinese population ages, there is a growing consensus that the demographic which is nearing retirement may have to return to work or delay retirement so as to confront the challenge of such an aging population. However, so far few studies have investigated the issue from the perspective of an individual's subjective well-being. This study focused on the relationship between work and happiness of the newly retired group in urban China, and it aimed to understand the relationship between the two factors. Drawing upon the activity theory, we hypothesized that work and happiness of the newly retired were positively correlated. Specifically, income, social capital, and personal attitude caused a positive mediating effect on the relationship between work and happiness, while leisure caused a negative mediating effect. To test the above hypotheses, we employed the survey data of China Family Panel Studies (CFPS) in 2010. We collected a sample of 3,406 newly retired residents in urban China, including men aged from 60 to 69, and women 50 to 69 years old. The sample was distributed in 25 provinces, which excluded Hong Kong, Macao, Taiwan, Sinkiang, Tibet, Qinghai, Inner Mongolia, Ningxia and Hainan. In the questionnaire, we focused on the following battery of questions, such as work, self-reported happiness, annual income, social capital, individual attitude, amount of leisure time, and leisurely activities. We also controlled for socio-demographic factors, support of family, and personal health, etc. After conducting an independent samples t test and regression analysis, we found that the newly retired who were working were less happy than those who were retired. In other words, work and happiness were negatively correlated, which was opposite to the hypothesis. Furthermore, results of the mediation effect model suggested that leisure was a significant mediating variable, while factors such as income, social capital and personal attitude were insignificant. Thus we concluded that the negative effect of work on happiness through the loss of leisure could not be offset by the positive effects caused by the change of income, social capital and personal attitude, which demonstrated why work and happiness were negatively correlated. This study firstly constructed a theoretical framework to explain the relationship between work and happiness of the newly retired and tested the hypotheses by using multiple mediator models with a Chinese national-wide data set. The study also has several practical implications to promote the subjective well-being of the older generation who are working in a increasingly ageing society. According to these findings, the labor market needs to be improved for senior citizens, and more concern needs to be given to their social and spiritual needs.