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Finke: What Makes a Successful Retirement?

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According to Harvard Professor Dan Gilbert (the guy in the new Prudential ads), life in retirement may not be what you imagine. Instead, it’s better “to look at other people who are in the very future you’re imagining.” So let’s have a look at what research has to say about retirement living to see whether it resembles our vision of the golden years.

Retirement is an abstract concept until it happens. You develop a routine of driving to work, interacting with coworkers, addressing challenges and finishing projects. Then you drive back home again, have dinner, relax, then wake up and go to work. But what happens when you quit your routine? How easy is it to establish new habits and take on new challenges? What do people actually do when they retire?

Financial advisors spend a lot of time helping clients become financially prepared for retirement. But retirement isn’t just about money. It’s about using the money to get the most out of a unique life stage that involves a huge increase in free time that needs to be filled, a greater reliance on social interaction, spending a lot more time with your partner (and, unfortunately, without for those who outlive their spouse) and predictable physical and mental decline.

This is a new area of research, but there are a number of studies that give us a much clearer picture of life in retirement. Understanding what others do in old age and what makes them happy can help us develop strategies that are most likely to result in a satisfying retirement.

There are two basic theories of retirement living. The first is continuity theory. According to continuity theory, retirement is a potentially stressful life change. If we try to maintain our environment—our home, city, friends, activities—then we’ll be happier in retirement than if we try to break out of our routine too quickly. The second is activity theory. Starting anew forces us to break out of old habits, establish new routines, meet new people, and create a new lifestyle that isn’t just normal life without the work.

The good news is that we have data that can help us test these theories.

What you do and how much you do it can have a big impact on retirement satisfaction. For those pining for a relaxed retirement, the news isn’t good. A significant reduction in activity is associated with lower satisfaction (controlling for health effects). It is, in fact, better to burn out than it is to rust.

Those who listed maintaining an active lifestyle as a goal did much better. Active leisure activities and social contact, and in particular activities that require some skill but were not overly difficult, resulted in a more satisfying retirement. So don’t watch TV, but do travel, exercise, meet regularly with friends, and engage in activities that require some (but not too much) mental and physical effort. And creating a routine, for example by volunteering weekly to help grade-schoolers learn reading skills, ensures that you won’t forget to maintain rewarding mental challenges.

If you’re more active, you tend to be happier in retirement. But part of this correlation is to be expected. Unhealthy, less active people often have to retire earlier and are not surprisingly less happy during retirement. It turns out that the strongest predictor of retirement satisfaction is almost always health. Making an investment in one’s health, for example through regular exercise and a prudent diet, is just as important as investing money for retirement. As we’ll see from other research, it may be even more important to invest in health and maintain close friendships and hobbies than it is to arrive at retirement with a stack of cash.

Retirement Stages

Some see retirement as a set of transitions that are affected by physical and mental decline, or the so-called “go-go, go-slow and no-go” stages identified in Michael K. Stein’s The Prosperous Retirement: Guide to the New Reality.

These stages and their impact on projected retirement spending make intuitive sense. We start out retirement in good health and make the most out of it by traveling and enjoying life to its fullest; we begin to slow down as our bodies and minds become less capable of handling more vigorous activity; and finally we reach a stage where we become more dependent on others in advanced age. Studies of spending in retirement are consistent with the retirement stages idea. David Blanchett, head of retirement research at Morningstar, has identified a so-called retirement spending smile pattern where retiree spending is highest in the earliest and latest stages.

Research on time use backs this up as well. Both men and women increase their active leisure time in their late 60s and early 70s (things like playing golf, having lunch with friends, cleaning the house) but then begin cutting back after 75. Among active leisure activities, time spent on sports activities increased only by about 15 minutes and on hobbies by about 20 minutes on average between age 65 and 74 and then begins to fall again to near pre-retirement levels. So much for using retirement to while away the days sailing or working on your stamp collection.

What does increase? Passive leisure (like watching TV) and personal activities such as bathing, dressing and receiving medical care. In other words, the types of activities that do not tend to show up in financial services ads showing healthy, vibrant retirees surfing, playing golf or taking long walks on the beach.

It’s also important to remember that wealthier retirees have more access to goods and services that help them spend more time in active leisure. You’re more likely to walk on the beach if you live near one. You’re going to be more social if you move into a retirement condo or have the means to eat at restaurants. There’s no sailing if you don’t have a sailboat. Given that a third of retirees get most of their income from Social Security, leisure opportunities might be limited.

Joseph Heider, managing principal for Rehmann Financial in Westlake Ohio, agrees that spending does seem to follow a predictable pattern. In early retirement, “they go through the phase of fulfilling their dreams, and that phase generally will last five to even 20 years.” This phase is followed by a stage where clients develop a retirement lifestyle routine. “They’re still very active,” notes Heider, “but how many times can you go to the wine country in France?” Although they may still travel, “it’s much more toned down, and it tends to revolve around family.”

The later stage of retirement living often involves an inevitable decline in abilities and possibly the death of a spouse. “Because of physical or mental limitations,” says Heider, “they tend to lead a sedentary life where they may get out a little bit from time to time, they still may be living on their own, but outside of health expenses their budgets tend to go down.” Health expenses are what create the retirement “spending smile”—at least in the United States (other industrialized countries with pooled long-term health protection will see a “spending smirk”).

Gilbert points out that our satisfaction with retirement may be related to the irreversible nature of the condition. If we decide to just slow down and take occasional part-time employment at age 65, we may not be as content with retirement because we are constantly reassessing our other options. Those who consciously choose to retire at a certain date and buy into the permanence of the new life condition may actually be more happy than those who choose to hold on to the possibility of rejoining the workforce.

This resonates with what Heider has seen among his clients. Those who are able to leave their job life behind and start a new life are often better off in retirement than those who try to hang on. This means not tying your identity to your job. Being a CPA or an engineer “wasn’t who they were, it’s one of the things that they did. So when they retire they look at it as they just entered a new phase of life rather than that they had just given up their identity.” Although keeping a foot in the door of your old profession provides more options for a retiree and can create a sense of purpose, many don’t consider the tradeoff in retirement living. According to Heider, “they want to hang on because their identity is wrapped in what they do and what they’ve done and they’re miserable.”

This can help explain the remarkable measured happiness of retirees with lower income and fewer skills. They don’t have anyone phoning them up asking them to take on just one more project—they now see themselves as retired and their lack of choice fits well with our brain’s ability to “simulate” satisfaction with one’s current condition.

Gilbert is most well known for his research that shows how we tend to overproject how much happier we will be in the future if we, for example, have more money and are able to take around-the-world cruises or buy a villa on the beach in retirement. It is then a little ironic that Gilbert was hired by a financial services firm, since his research on “impact bias” points out that we might be prone to oversave for retirement by imagining ourselves living like the happy older couples on the beach in commercials, when in fact we might be just as happy with a more modest (and permanent) existence. And in his newest commercials, he encourages viewers to imagine doing “what you love” by becoming a writer or a baker when his own research suggests that we might overproject the amount of happiness we’d get from such a major life change.

Research by University of Wisconsin professor Keith Bender gives us a clearer idea of what creates a satisfying retirement. As expected, being forced to retire is a prescription for an unhappy retirement. Men are less satisfied than women in retirement. If one spouse is still working, this has a negative impact on the satisfaction of the one who isn’t still working (an argument that couples should coordinate retirement). Married retirees are better off, which perhaps argues against the rise in divorce among empty nesters. Consistent with Gilbert’s hypothesis that we tend to become more satisfied when we accept our current state, retirement satisfaction increases as we get older. Retirees who may be initially unhappy with their new lifestyle may actually learn to enjoy it later on.

Financial Factors

The real surprises relate to the complex influence of money on retirement. More wealth does lead to greater happiness in retirement, but the relationship actually starts to decline at high levels of wealth (about $2.3 million). This does make some sense if managing an amount greater than most can reasonably spend in retirement becomes a burden.

Retirees with annuitized income are also more satisfied. The amount of satisfaction retirees get from each dollar of Social Security and pension income is exactly the same — and is higher than the amount of satisfaction gained from a dollar earned from other sources of income. Retirees who rely solely on a defined contribution plan to fund retirement are significantly less satisfied with retirement. The importance of automatic retirement income is consistent with my own studies on declining cognitive abilities in advanced age as well as the simple intuition that managing an investment portfolio and deriving an appropriate income takes work that might be better delegated to a pension manager or automated through the purchase of an annuity.

One of the reasons very wealthy retirees might not be happier is that they don’t bother to actually spend their savings before they die. Urban Institute researchers Karen Smith, Mauricio Soto and Rudolph Penner looked more closely at how retirees spent their savings throughout retirement and found some interesting differences between the wealthy and the middle class.

It turns out that the wealthiest retirees actually tend to increase their asset holdings well into their 80s. Middle income retirees seem to do a pretty good job of conservatively spending down their assets over time. The richest retirees draw down their defined contribution assets (because they have to) but they don’t seem to spend much more than less wealthy retirees. This result is consistent with older analyses that also find no evidence that retirees actually follow the conventional advice to spend a safe percentage of their wealth each year in retirement. They seem to just watch it grow.

This, of course, leads to the question — why did you accumulate the money in the first place? Isn’t the point of spending less and carefully investing during our working years so that we can live better in retirement?

Part of the problem may be that we have a hard time spending our assets, but no trouble spending our Social Security or a pension. This may also help explain why pension income leads to far more satisfaction than income derived from wealth. We feel guilty spending $5,000 from an investment account to pay for a cruise but have no trouble paying for it with our pension and Social Security.

Although old age does lead to predictable declines in our senses, physical and mental abilities, more recent retirees are living longer and more active lifestyles than in the past. Studies show that a greater percentage of 80-year-olds are able to lift a five-pound weight or walk up a flight of stairs than in the past, and this increase in physical ability seems to be getting better with each generation. Improved physical abilities mean that the active stage of retirement will last longer, so the go-go period might not end at 75.

Part of delaying our no-go phase can be attributed to advances in medical science. Heider has seen this change among his own clients. “Forty years ago people couldn’t get hip joint replacements or knee replacements at older ages.” Before advances in medical sciences, deteriorating body parts would limit what an older person could do in retirement. Thankfully, that’s no longer the case. “I notice that once they have those kinds of surgeries they tend to be more mobile, they look better, they’re more engaged, they’re happier,” says Heider.

So how does a clearer vision of the golden years help an advisor develop a retirement living strategy? It does help to imagine what retirement life will look like. When you decide to retire, buy into it as a new lifestyle. Use money to live somewhere where you’re most likely to be social and spend time in active leisure. Develop your hobbies and friendships while you’re still working so you know how to get the most out of life without work. Consider turning retirement assets into a regular flow of income. And face the fact that we will decline physically and mentally later in retirement.

Most importantly, remember that money alone doesn’t buy a happy retirement. Perhaps the most valuable resource you get from retirement is more time. How are you going to use it?

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