One of the perks of writing this column over the last year for Financial Advisor is that I've had a great deal of research forwarded to me. Most of it focuses on withdrawal rates, the survivability of a portfolio, and similar issues that can be easily described or measured mathematically. I have seen studies on safe withdrawal rates, safe savings rates and safe retirement ages. All of the numbers can be useful in determining if the client is ready to retire.
However, we practicing financial planners know full well that even if the numbers add up, the client may not be ready to retire. We also see a fair number of clients who struggle with being a retiree in ways that have nothing to do with money. This column will focus on some of the thinking and findings surrounding happiness in retirement.
My working definition of retirement is that it is a point in time when no income comes directly from one's labor. Typical retiree income from Social Security, pension income and cash flow from a portfolio are affected by factors retirees cannot control. Retirees may also feel a lack of control over other kinds of things, such as changes to the tax code that affect their income and the diminished health and vitality of their peers. In short, retirees can find plenty of reasons to be unsettled.
Control, or the perception of control, is a key issue cited by many commentaries on happiness. Closely related to this is whether a person still feels relevant. When one works, one is needed. When one leaves the workforce, he or she can feel irrelevant and helplessness.
To counteract this, many advisors encourage their clients to create compelling visions of their retirement. We may have clients describe the perfect day or week. The more specific, the better. Really, what are they going to do when the alarm goes off (or doesn't) and they are not required to be anywhere or do anything in particular. For couples, the "honey do" list is part comical cliché and part conflict-ridden truth. Now that both spouses are home and potentially together for an additional eight to ten hours a day, what will they expect of each other?
Many planners encourage clients near retirment to have a "dress rehearsal." For instance, if a client plans to spend a great deal of time in retirement volunteering but is not doing much of that now, a planner may suggest that the client spend a couple of hours on weekends donating to various projects to see if it's as satisfying as the client thinks it will be.
Leaving the workforce doesn't just change retirees' financial picture, it alters their entire social structure. Most people are at work 40 or more hours a week. They have connections, relationships and friendships tied to their jobs. Some of these friendships will persist, but many will simply fade away. The void can be huge.
Americans tend to tie so much of their self-image to their work. For many, what they do is who they are. How will your clients describe themselves in retirement? How will they answer that question, "What do you do?"
Many clients will talk about spending more time with family. Have you ever wondered if their family is as enthusiastic about this prospect as your clients? What exactly does that mean? Does that mean that they will travel a couple times more often a year or does that mean they're packing everything up and moving in next door to their kids?
Visioning exercises and conversations about these issues are worthwhile, but we advisors should not ignore what researchers are learning about a happy retirement.
The financial services industry loves to paint it as one long vacation full of fun. In their study "Affective Well-Being in Retirement," published in the Journal of Happiness Studies (yes, there is such a thing), Andrew Burr, Jonathan Santo and Dolores Pushkar say about retirement, "It is also a hallmark of the transition to the later stages of life and an introduction to the realities of aging."
Much happiness research has shown that money makes people happier, but only to a point. Once basic needs are met, additional money has a diminishing effect on happiness. Generally, an additional $10,000 in income has a bigger happiness effect on someone taking in $20,000 than it does for someone already drawing $200,000.
Some research finds retirees are happier with a defined benefit pension than they are with a comparable amount of wealth in a retirement account (Bender (2004); and Panis (2003)). Apparently, the perceived certainty of a pension is stronger than the uncertainties that come with managing a lump sum.
Burr, Santo and Pushkar's work shows that an absolute amount of wealth or income is not as important as a factor in happiness as the perception that people are better off than their peers. They also found those with "outward orientation," the successful engagement with the world through friendships and activities, are much happier. People with high levels of "enhancement," which means they care a lot about status, power and what others thought of them, are less happy.
As one might expect, health has come up in several studies. Good health correlates with higher levels of happiness and poor health with lower levels. Functional limitations that lead to everyday hassles are particularly troublesome (Dulin and Pachana (2005); and Kosloski et al. (2005)).
Retirees who are married tend to be happier than those who are single (Bierman, Fazio, and Milkie (2006)). The death of a spouse, not surprisingly, significantly diminishes happiness (Cheng and Chan (2006)).
Oliver Robinson of the University of Greenwich notes, "Our most surprising finding was that retirees who had children and grandchildren were no more satisfied with life than the retirees without them." In a talk to the British Psychological Society, he explained, "People think they will bring happiness, but childless couples are not worse off. This is dispelling the myth that happiness comes from spending more time with your children and grandchildren. Childcare commitments are an issue. There is a sense of enjoyment but a subtle burden."