Tue. Oct 19th, 2021

There is a limit to how much happiness money can buy.

This is one of the most provocative lessons I have from a recent survey of retirees conducted by the Employee Benefits Research Institute (EBRI). Conducted last fall, the EBRI surveyed 2,000 retirees between the ages of 62 and 75 with less than $ 1 million in retirement assets. One of the many questions in the survey made retirees assess their level of satisfaction with retirement life.

The ability to correlate their responses with retirement assets is based on how EBRI divided their sample. Based on income, wealth, and spending factors, retirees were classified into five categories or profiles.

The attached graph represents the average satisfaction scores of these five profiles. Note, however, that for a profile, all scores are within a fairly close range.

The only atypical value is the so-called “Fight” profile, with an average satisfaction score of 5.75, with 1 indicating extreme dissatisfaction and 10 indicating extreme satisfaction. And it’s no surprise that retirees in this group had lower levels of satisfaction than the other four.

This is because, according to EBRI, retirees in this profile “had low levels of financial assets (less than or equal to $ 99,000) and income (less than $ 40,000 per year) … more likely than anyone another group to rent instead of owning their homes; … they are likely to have unmanageable debts, such as credit card debts and medical … [and] rely on Social Security to provide most of your retirement income. “

At the other end of the spectrum, EBRI “Affluent” profile retirees typically had high levels of financial assets ($ 320,000 or more) and annual income of $ 100,000 or more. In addition, “they were mainly homeowners with no mortgage, no debt … [and] he was seldom reported to have credit card debt and car loans. ”Therefore, retirees in this category are fully expected to have higher levels of satisfaction than retirees in the“ Fight ”profile.

What is However, the average satisfaction score of the three profiles between these two extremes is surprising. Note that they are quite close to the “Tributary” profile. Although I do not have access to the underlying data, my intention is that the differences in scores for these four top profiles (all of which are not in the “Fight” category) are not statistically significant.

The conclusion I have: Once we jump over some initial financial hurdle in preparing for retirement, there is relatively little correlation between more wealth and greater happiness. Also, this initial hurdle is pretty low.

The implications of the investment

Perhaps the most important implication for the investment I will draw from this is that it is better to avoid the worst of cases than to “shoot the moon” and bet everything to achieve the best of cases. Once your basic financial needs are met, the extra wealth will quickly decrease returns in terms of satisfying your retirement. Therefore, it makes little sense to incur disproportionate risks in pursuit of these diminished returns.

One portfolio move you could make in response to this investment implication is to surrender a portion of your retirement portfolio. By doing so, you can block a guaranteed monthly payment that will last as long as you live (or a spouse). Your goal could be to get the most out of your portfolio to jump over the low hurdle identified in the EBRI survey, thus avoiding ending the “Fight” profile of retirees.

To illustrate this, consider the flow of annuity payments that you could block if you purchased a $ 100,000 annuity as a 65-year-old single man. According to ImmediateAnnuities.com, at current rates you could get a guaranteed monthly income of $ 501 per month until your death. . This would be higher than any Social Security or pension payment you are already entitled to.

Whether an annuity is a good idea depends on a number of factors, such as whether you are likely to survive your actuarial life expectancy. You will definitely need to consult a qualified financial planner before considering an annuity, as the devil is in the details.

In any case, keep in mind that you are unlikely to want to make your entire retirement portfolio profitable. The optimal amount depends on various assumptions, such as age, marital status, portfolio size, life expectancy, market yields, and so on. A few years ago, David Blanchett, head of retirement research at Morningstar, looked at more than 78,000 possible scenarios, each of which represents a different set of assumptions. The average optimal life annuity allocation in all these scenarios was 31%.

The conclusion? Only to a limited extent can money provide you with satisfaction for retirement. Plan accordingly.

Mark Hulbert regularly contributes to MarketWatch. His Hulbert Ratings keeps track of investment bulletins that pay a fixed fee to be audited. You can contact him at [email protected]

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