The art of a successful retirement

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?