Can money buy happiness?

Crosby_2015-150x150 Dr. Daniel Crosby Executive Director, The Center for Outcomes & Founder, Nocturne Capital

“Wealth is the ability to fully experience life.” – Henry David Thoreau

In your Psych 100 class, you were likely introduced to the concept of “operationalization,” where one concrete variable serves as proxy for a fuzzier, harder to measure construct. It is no secret that for many, the amount of wealth they have amassed serves as shorthand for happiness, but such is hardly the case. While wealth is positively correlated with well-being to a point, disconnecting money from purpose is a formula for emotional bankruptcy. One such self-delusional variant of chasing money for happiness is the “I’ll stop ignoring my happiness when I reach XYZ number.” Your magic number may be a salary or it may be a wished-for dollar amount to have in the bank. Whatever it is, I can promise you that when you get there, it won’t seem like enough. You see, we are not conditioned to think of money in terms of “enough.” As one of my clients once said to me, “Doc, you can never be too rich or too skinny.”

The scientific name for this phenomenon is the “hedonic treadmill” or “hedonic adaptation,” referring to the fact that we must make more and more money to keep our level of happiness in the same place. What tends to happen is that our expectations rise and fall with our earnings (as well as other circumstances in our life), keeping our happiness at a relatively stable place. To demonstrate this effect, I’d like for you to consider two groups that seemingly have little in common – paraplegics and lottery winners.

Can money buy happiness

 
Suppose I asked you, “Which would make you happier, winning the lottery or being in a crippling accident?” Not too tough, right? So, we would hypothesize that one-year after the life-changing event, lottery winners would be much happier and paraplegics would be much sadder. But this is simply not the case. One year after their respective events, it makes little difference whether you are riding in a Bentley or a wheelchair – happiness levels remain relatively static.

Why? We tend to overpredict the impact of external events on our happiness. One year later, paraplegics have discovered their accidents were not as catastrophic as they may have feared and have coped accordingly. Similarly, lottery winners have found out that having money brings with it a variety of complications. No amount of spending can take away some of the tough things life throws at each and every one of us. As the saying goes, “wherever you go, there you are.” In much the same way, we tend to project forward to a hypothesized happier time, when we have more money in the bank or are making a bigger salary. The fact of the matter is, when that day arrives, we are unlikely to recognize it and will simply project forward once again, hoping in vain that something outside of ourselves will come and make it all better.

A recent Princeton study set out to answer the age-old question, “Can money buy happiness?” Their answer? Sort of. Researchers found that making little money did not cause sadness in and of itself but it did tend to heighten and exacerbate existing worries. For instance, among people who were divorced, 51 percent of those who made less than $1,000 a month reported having felt sad or stressed the previous day, whereas that number fell to 24 percent among those earning more than $3,000 a month. Having more money seems to provide those undergoing adversities with greater security and resources for dealing with their troubles. However, the researchers found that this effect (mitigating the impact of difficulty) largely disappears at $75,000.

For those making more than $75,000 a year, individual differences have much more to do with happiness than money. While the study does not make any specific inferences as to why $75,000 is the magic number, I’d like to take a stab at it. Most families making $75,000 a year have enough to live in a safe home, attend quality schools, and have appropriate leisure time. Once these basic needs are met, quality of life has less to do with buying happiness and more to do with individual attitudes. After all, someone who makes $750,000 can buy a faster car than someone who makes $75,000, but his or her ability to get from point A to point B is not substantially improved. Once our basic financial needs are met, the rest is up to us. Hard work provides the means, but we must find our meaning.

If happiness does not come from hitting the lottery and sadness is not borne of personal tragedy, what does make us happy? Well, fortunately or unfortunately (depending on how well-adjusted your parents are), a great deal of happiness comes from our “hedonic set point,” which is genetically determined. A ten-year, longitudinal study of 1,093 identical twins found that between 44 percent and 52 percent of subjective wellbeing is accounted for by genetic factors. So, roughly half of what makes you happy is out of your control I’m sorry to say.

Of the remaining 50 percent, roughly 10 percent is due to external circumstances and a whopping 40 percent is due to intentional activities, or the choices we make and the purpose we create. We discussed before how we tend to overrate the importance of the things that happen to us, and sure enough, only 10 percent of what makes us happy is accounted for by lucky and unlucky breaks. Eighty percent of the non-genetic components of happiness can be controlled by our attitude and by making choices that are consistent with finding true joy. The first step in this pursuit is ensuring that the goals we are setting for ourselves are consistent with finding true happiness.

If 80 percent of the happiness that is in our control comes from setting and working toward positive goals, what sort of goals should we be setting? Headey has found that goals focused on enriching relationships and social resources are likely to increase wellbeing. We connect with a number of close friends and find joy within those relationships. On the other hand, he found that goals based around monetary achievement have a negative effect on overall wellbeing. Unlike friendship, which we “consume” in limited but satisfying quantities, we feel as though we can never really reach a financial goal. Having a core group of close friends sates us; it is sufficient to meet our social needs and we do not pine for ever-greater numbers of friends. Not so with financial goals; just as we reach our former goal, the hedonic treadmill kicks in and our excitement over having “arrived” is gone in an instant. Dr. Daniel Gilbert, a happiness expert at Harvard University, says that pursuing wealth at the expense of more satisfying goals has a high opportunity cost. “When people spend their effort pursuing material goods in the belief that they will bring happiness, they’re ignoring other, more effective routes to happiness.” The simple fact is this: chasing money and material goods is an itch that our flawed psychology will never let us scratch, unless we can define our financial goals in terms of the personal ends they will meet.

In a money-obsessed world that has socialized us to chase the almighty dollar, it can be weirdly unsettling to learn that money isn’t everything. As much as we whine about money, having something that is the physical embodiment of happiness is nice. We can hold it, save it, get more of it, all while mistakenly thinking that getting paid is how we “arrive.” Realizing that money does not directly equate to meaning can leave us with a sense of groundlessness, but once we’ve stripped away that faulty foundation, we can replace it with things that lead to less evanescent feelings of happiness. Breaking your overreliance on money as a substitute for real joy is a great first step, a second step is learning to spend your wealth in ways that matter.

Lest we swing from the extreme of “money is the only good” to the opposite extreme of “money is no good,” it is worth noting that there are ways in which money can be spent to improve happiness. A lot of our troubles with money stem from the way we spend it, thinking that buying “things” will make us happy. We engage in retail therapy, which is quickly followed by feelings of regret at being overextended. Before we know it, we’re surrounded by the relics of our discontent; the things we bought to be happy become constant reminders that we’re not. Instead of amassing a museum of junk, spend your money on things of real value. Spend a little more on quality, healthy food and take the time to savor your new purchases. Use your money to invest in a dream – pay yourself to take a little time off and write that novel about which you’ve always dreamt. Give charitably and experience the joy of watching those less fortunate benefit from your wealth. A growing body of research suggests that the most important way in which money makes us happy is when we give it away. Finally, spend money on having special experiences with your loved ones. It’s true that money doesn’t directly buy happiness, but it can do a great deal to facilitate it if you approach it correctly.

The Center for Outcomes, powered by Brinker Capital, has prepared a system to help advisors employ the value of behavioral alpha across all aspects of their work – from business development to client service and retention. To learn more about The Center for Outcomes and Brinker Capital, call us at 800-333-4573.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.

Money Missteps to Avoid in Retirement

frank_randallFrank Randall, AIF®, Regional Director, Retirement Plan Services

 “Good decisions come from experience,

and experience comes from bad decisions.”

By the time you feel ready enough to retire, you have likely had your fair share of blunders along the way. Now seasoned with experience, the realization that mistakes are inevitable, and having the ability to recover can make the difference between success and failure.

Here are some of the most common missteps in retirement:

  • Focusing on the wrong factors. Many people decide to retire when they reach a certain age, job fluctuations or business cycles. While these factors may have influence, your emotional readiness, savings, debt, future budget and income plan to sustain your desired lifestyle must also be considered.
  • Overlooking the importance of your Social Security election. Some experts say the difference between a good Social Security benefit election and a poor one could equate to more than $100,000 in income.[1] The biggest decision retirees face concerning Social Security is when to start collecting. Just because you can start receiving benefits at age 62 doesn’t necessarily mean you should. If you delay your election until age 70, you may receive 32% more in payments so it may make sense to delay receipt of benefits as long as you can meet your expense obligations.
  • Underestimating the cost of retirement. Most people estimate retirement expenses to be around 85% of after-tax working income. In reality, however, many retirees experience lifestyle sticker-shock as the realities of retirement. One common problem retirees have when budgeting for retirement expenses is that they overlook items like inflation, future taxes, health care, home and car maintenance, and the financial dependence of their loved ones (e.g., sandwich generation costs).
  • Retiring with too much debt. A simple rule of thumb is to pay off as much debt as possible during your earning years. Otherwise, debt repayment will cause a strain on your retirement savings.
  • Failing to come up with an income strategy. Saving is only part of the retirement planning process. You also have to think about spending and decide where and in what order to tap investments. When thinking about cash flow needs throughout retirement, one must also consider how retirement funds can continue to generate growth. An effective way to solve retirement income needs is to have a liquid cash reserve account tied to your portfolio.  The reserve is tapped to deliver a “paycheck” to help you meet predictable expenses. The cash withdrawn is replenished by investments in dividend- and income-producing securities.
  • Dialing too far back on investment risk. As many workers near retirement, they become fixated on cash needs, thus dialing back risk and becoming more conservative in their investments. Unfortunately, the returns generated by ultra-conservative investments may not keep pace with inflation and future tax liabilities. Because retirement can last upwards of 20 years, retirees must set both preservation and growth investment objectives.
  • Not validating the assumptions made during the retirement planning process. You make certain assumptions about investment performance, expenses, and retirement age when you initially create your projected retirement plan. At least annually, you should reconcile your projections against reality. Are you spending more and earning less than anticipated? If so, you may have to make changes, either to your plan or your lifestyle.
  • Providing financial support to adult children. Over the last decade, the number of adult children who live with their parents has risen 15% to a historic high of 36%. Providing financial support to anyone, particularly an adult child, is stressful. It could strain retirement savings and ultimately could create long-term financial dependency in your child.
  • Going it alone. While your financial mission in retirement may seem straightforward—don’t outlive your money—the decisions you make along the way can be complicated. An experienced financial advisor can give you piece of mind for many reasons. An advisor can help you manage your retirement portfolio to meet your preservation and growth objectives, help you establish an income strategy that is matched to your spending needs, and track your spending versus assumptions. If a crisis arises, a trusted financial advisor will already know your financial history and can help make decisions that are in your best interests. Similarly, it is extremely helpful to have a trusted advisor relationship solidified in the event your cognitive abilities decline and you need help with decisions.

[1] http://www.cbsnews.com/news/a-great-new-tool-for-deciding-when-to-take-social-security/

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Retire Healthy, Retire Happy

Sue BerginSue Bergin, President, Bergin Communications

Most retirement planning focuses on the nest egg. It involves making sure you have enough saved to live your retirement years the way in which you have dreamed. The laser-like focus on the bottom line, however, could prevent you from paying attention to the single most important predictor of retirement satisfaction. Your health.

According to MassMutual’s Health, Wealth and Happiness in Retirement study, health is typically more important than wealth when it comes to determining the well-being of American’s retirees. Retirees in better health are more likely to feel financially secure, enjoy retirement, feel fulfilled, and are less likely to experience negative emotions.

The study shows that the loss of health is more costly to a retiree’s overall experience than the loss of wealth. Consider these stats:

  • 76% of those with $250,000 or more in assets report having a positive retirement experience, compared to 68% of those with less than half the assets.
  • 80% of those in better health report having a positive experience in retirement, compared to only 59% of those who are in poorer health, regardless of their balance sheet.
  • 73% of retirees in better health report feelings of financial security compared to 51% of retirees in poorer health.
  • Retirees in poorer health were twice as likely to feel anxious about their finances and lack a sense of purpose, and three times more likely to feel lonely.

The bottom line…focus on your health!

To make the most of your retirement, your planning and preparation should focus as much on your health as it does your wealth.

AARP provides these helpful tips to incorporate into your retirement readiness checklist.

  • Seek preventative medical care by scheduling checkups and routine examinations, from annual physicals to teeth cleanings.
  • Work with your health care providers on a plan to improve or maintain your health.
  • Commit (or recommit) to eating healthy, exercising and adequate sleep.
  • Commit to staying mentally sharp with brain games, puzzles and books.
  • Stay in close contact with family and friends. Typically, your friends and family will be the first to notice if your health starts to slip.

For more tips from AARP, see 10 Steps to Get You Ready for Retirement.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.