The secret to a satisfying retirement involves more than just your 401(k) balance.
Living richly in retirement
What makes for a happy retirement?
Having good health and an active social life. A recent Merrill Lynch study found that 81 percent of retirees ranked health the most important ingredient for a happy retirement, compared with 58 percent who said it was financial security. And with study after study showing that physical activity and strong social connections are critical for maintaining health in old age, many financial advisers say that retirees should think just as hard about how they’re going to spend their time as how they are going to spend their money. One study shows that the risk of depression goes up 40 percent after retirement—often triggered by loneliness or boredom. “It’s rarely about account value” for the happiest retirees, says David Evans, president of Evans Financial Group in Shreveport, La. “They can tell you, ‘Here’s what I’m doing next week’ and ‘This is who I’m spending time with.’”
How much difference does money make?
Money definitely matters, but it’s not everything. Research by Nobel-winning economist Angus Deaton has shown that money stops adding significantly to people’s happiness at an annual salary of $75,000. A recent survey of 1,400 retirees found that happiness tapered off after they attained $550,000 in net worth. “Once you reach a certain level, more money doesn’t buy a lot more happiness,” says financial planner Wes Moss of Capital Investment Advisors.
What’s the best way to spend for happiness?
While you can still enjoy it. After spending an entire career stashing money away for their golden years, many people are hesitant to dip into their savings, even when they can afford to. A 2015 survey by Vanguard found that retirees with at least $100,000 in savings ended up reinvesting 40 percent of the money they withdrew from their retirement accounts. And while many people fear running out of money in retirement, older people can overestimate how long they will live. “We have a tendency to put off spending for enjoyment, thinking both that it is financially prudent and that delaying will increase our gratification,” says Meir Statman, a professor of finance at Santa Clara University. “I’m not suggesting people spend every penny they have by age 95. But most people have a lot more leeway to spend than they realize.”
What’s behind the hesitation?
The transition from saving to spending is more difficult than many people expect. Financial advisers say many retirees have no problem spending income from interest or dividends generated by their investments, but there’s a mental block when it comes to dipping into capital. Retirees can get around this psychological barrier by automating their income, much the same way investors are encouraged to automate their saving for retirement. One option is to dedicate some savings to an immediate annuity, which converts a lump-sum payment into a lifetime of monthly payments. A 65-yearold man who puts $100,000 into an immediate annuity today, for example, would collect about $545 a month for life, according to ImmediateAnnuities.com. Managed-payout funds are mutual funds designed to pay out an equal amount every month, drawing on earnings and capital. Surveys show that retirees with a predictable monthly income stream tend to be less anxious about their finances than those relying mostly on investments.
What about working in retirement?
That’s not necessarily a bad thing. People who work past 65 tend to be happier and healthier than those who are fully retired. Jobs bring increased social connections, physical activity, and a sense of purpose. The extra income also means not having to rely as heavily on savings and provides an opportunity to delay taking Social Security, which means a higher payout later on. But there’s a caveat: The health-and-happiness benefits drop off for those who have no choice but to keep working in retirement. Retirees who voluntarily work part-time rate their happiness 6.5 (on a 10-point scale) on average, compared with 4.4 for those forced to take a part-time job. But whether it’s working, traveling, volunteering, or finding a hobby, experts tend to agree that the people who find meaningful ways to stay engaged with the world are the ones who enjoy the happiest, longest retirements. “That’s critical to longevity,” Evans says. “Who wants to work 40 years, retire, and be sad because I’m sitting on the porch or watching TV all day? That would depress me.”