Happy Retirees? Maybe Not Why Life Satisfaction Isn’t Necessarily ‘U-Shaped’ After All

Happiness, experts say, is U-shaped: generally speaking, we are happy/full of life satisfaction as young adults but, as we reach middle age, we become less satisfied, with a trough in one’s early 50s; from this trough we rebound to ever-increasing satisfaction levels as we age. It’s remarkable, really, considering the physical infirmities we face, plus financial worries, loss of loved ones, and more. What explains this? We become wiser and we are able to see all of life’s ups and downs with a greater sense of perspective.

But what if that’s not true?

A new working paper by Peter Hudomiet, Michael D. Hurd and Susann Rohwedder, researchers at RAND Corporation, suggests an entirely different answer: older individuals have greater life satisfaction because the less-satisfied folk have been weeded-out. And by “weeded-out” I mean that they’re dead or otherwise unable to reply, because the likelihood of dying is greater for those who have less life satisfaction. When they apply calculations to try to strip out this impact, the effect is dramatic: rather than life satisfaction climbing steadily from the mid-50s to early 70s, then remaining steady, they see a steady drop from the early 70s as people age.

Here are the three key graphs (used with permission):

First, life satisfaction plotted by age without any special adjustments:

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Life satisfaction by age, unadjusted
Life satisfaction by age, unadjusted used with permission

Second, the difference in mortality between the satisfied and the unsatisfied:

Mortality by age and life satisfaction
Mortality by age and life satisfaction used with permission

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And, third, the same life satisfaction graph, adjusted to take into account the impact of the disproportionality of deaths:

Life satisfaction adjusted for death rates
Life satisfaction adjusted for death rates used with permission

In this graph, the blue line represents the unadjusted outputs from their calculations, the orange line is smoothed, and the grey line adds in demographic, labor market and health controls, to strip out the impact of, for example, people in poor health being less satisfied and try to isolate the impact solely of age.

Here are the details on this calculation.

The data they use for their analysis comes from the Health and Retirement Study (HRS), a long-running survey of individuals age 51 and older at the University of Michigan, sponsored by the National Institute on Aging. It is a longitudinal study; that is, it surveys the same group of people every two years in order to see how their responses change over time, adding in new “refresher cohorts” to keep the survey going. The survey asks about many topics, including income, health, housing, and the like, and in 2008, the survey also began to ask life satisfaction, on a scale of 1 to 5 (”not at all satisfied” to “completely satisfied”).

One simple way of analyzing the data is to look at how life satisfaction ratings vary based on survey participants’ characteristics. The average reported life satisfaction of those between ages 65 – 74 is 3.91, just slightly below “4 – very satisfied.” But those who rate their health as “poor” average out to 3.13, or not much more than “3 – somewhat satisfied,” and those who rate their health as “excellent” average to 4.34. Those who have 2 or more ADL (activities of daily living) limitations some out to an average of 3.32 vs. 3.97 for those with no such limits. Those who are in the poorest quarter of the survey group come out to 3.7 vs. 4.07 for the wealthiest quarter. (See the bottom of this article for the full table; this table and the following graphs are used with permission.)

But here’s the statistic that throws a monkey-wrench into the data:

“On average, the 2-year mortality rate [that is, from one survey round to the next] is 4.4% among those who are very or completely satisfied with their lives, while it is 7.3% (or 66% higher) among those who are not or somewhat satisfied with their lives.”

As a result, “those who are more satisfied with their lives live longer and make up a larger fraction of the sample at older ages.”

Now, this does not say that being pessimistic about one’s life causes one to be more likely to die. Nor does it say that this pessimism is justified by being in ill-health and at risk of dying. But this statistical connection, as well as further analysis of survey drop-outs for other reasons (such as dementia) is the basis for a regression analysis which results in the graph above.

What’s more, the original “inventor” of the concept of the life satisfaction curve, David Blanchflower, published a follow-up study just after this one. One of their key concepts is the notion of using “controls” to try to identify changes in life satisfaction solely due to age rather than changes in income over one’s lifetime, for example, or other factors, and there has been extensive debate about whether or to what degree this is appropriate, given that the reality of any individual’s life experience is that one does experience changes in marital and family status, employment status, and the like.

Having received pushback for this concept, they defend it but also insist that the U-shape holds regardless of whether “controls” are used or not. At the same time, Blanchflower is quite insistent that the “U” is universal across cultures, though (see my prior article on the topic) it really seems to require quite some effort to make this U appear outside the Anglosphere, which is all the more interesting in light of the John Henrich “WEIRDest people” contention (see my October article) that various traits that had been viewed by psychologists as universally-generalizable are really quite distinctive to Western cultures and, more distinctively, the United States.

But here’s the fundamental question: why does it matter?

On an individual level, to believe that there is a trough and a rebound offers hope for those stuck in a midlife rut. It’s a form of self-help, the adult version of the “it gets better” campaign for teenagers.

On a societal level, the recognition of a drop in life satisfaction for the middle-aged might be explained, by someone with the perspective of the upper-middle class, as the result of dissatisfaction with a stagnating career, failure to achieve the corner office, the challenge of shepherding kids into college, and the like. In fact, when I wrote about the topic two years ago, that’s how the material I read generally presented the issue.

But Blanchflower’s new paper recognizes greater stakes: “These dips in well-being are associated with higher levels of depression, including chronic depression, difficulty sleeping, and even suicide. In the U.S., deaths of despair are most likely to occur in the middle-aged years, and the patterns are robustly associated with unhappiness and stress. Across countries chronic depression and suicide rates peak in midlife.” (In the United States, among men, this is not true; men over 75 have the highest suicide rate.)

And what of the decline in life satisfaction among the elderly?

The premise that the elderly become increasingly satisfied with their lives as they age is a very appealing one, not just because it provides hope for us individually as we age. It serves as confirmation of a more fundamental belief, that the elderly are a source of wisdom and perspective on life. Although it is Asian cultures which are particularly known for veneration of the elderly, the importance of caring for those in need is just as much a moral imperative in Western societies, even if without the same sense of “veneration” or of valuing them to a greater degree than others in need.

Consider, after all, that the evening news likes to feature stories of oldsters running marathons or competing in triathlons or even just having a sunny outlook on life; no one likes to think of the grumpy grandmother or grandmother from one’s childhood as representative of “old age.” In this respect, “old folks are more satisfied with life” provided an easy to make the elderly more “venerable.” Hudomiet’s research might force us to think a bit harder.

As always, you’re invited to comment at JaneTheActuary.com!

Full table of impact of demographic characteristics on life satisfaction:

Impact of demographic characteristics on life satisfaction
Impact of demographic characteristics on life satisfaction used with permission

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Elizabeth Bauer

Elizabeth Bauer

Yes, I’m a nerd, and an actuary to boot. Armed with an M.A. in medieval history and the F.S.A. actuarial credential, with 20 years of experience at a major benefits consulting firm, and having blogged as “Jane the Actuary” since 2013, I enjoy reading and writing about retirement issues, including retirement income adequacy, reform proposals and international comparisons.



Wes Moss Money Matters

So, are you setting yourself up for true happiness as a retiree? Sure, you’re planning the money piece, and that’s important. But, there’s also the personal piece of the retirement equation that’s just as important as the money part. Read more: https://www.wesmoss.com/news/7-skills… The 4% Rule: https://www.wesmoss.com/news/the-new-… Retirement Calculator: https://www.yourwealth.com/retirement… Send me your questions directly at https://bit.ly/3dPKcvd (contact box in top right corner) You Can Retire Sooner Than You Think https://bit.ly/3kiRhXJ Money Matters with Wes Moss podcast https://spoti.fi/3jk9wL8 or on Apple Podcasts https://apple.co/3kwKvhj Twitter: https://bit.ly/2HqnWfe Facebook: https://bit.ly/3kvrHi4 Check out my website for more financial tools and articles: https://bit.ly/3dPKcvd Please note, this information is provided to you as a resource for informational purposes only and should not be viewed as investment advice or recommendations. Investing involves risk, including the possible loss of principal. There is no guarantee offered that investment return, yield, or performance will be achieved. There will be periods of performance fluctuations, including periods of negative returns. Past performance is not indicative of future results when considering any investment vehicle. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax, or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.

Retiring During A Bull Market: What’s A Safe Withdrawal Rate?

Lucky you, to be retiring today, when your retirement assets are so richly valued. But not as lucky as you think. Rich stock and bond prices help only so much.

The big question for someone living off savings is how much can be safely pulled out every year. The old rule of thumb was 4%: If you had $1 million in your IRA, you could spend $40,000 the first year and kick up the annual withdrawal just enough to match inflation. At that rate you probably wouldn’t outlive your assets. Such a conclusion could be reached by looking back at stock and bond returns over the past century.

But now, with asset prices high? When prices are high, it’s easier for them to fall and harder for them to keep up with the cost of living. That changes everything.

We are living in strange times. Yields on bonds are abnormally low—indeed, for safe Treasury bonds, yields scarcely top the rate of inflation. Earnings yields are stocks are abnormally low, too. That is the same as saying that price/earnings ratios are high.

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Who knows why this is. It could be that investors are irrationally exuberant, or that the globe is awash in savings, or that the Federal Reserve is tossing dollars out of helicopters. Whatever the cause, it complicates the matter of safe withdrawal rates.

Stock prices have doubled in the last seven years. That helps, since you will be selling stocks as you age. But it doesn’t leave you in a position to double your spending.

To see why, imagine that your sole investment asset is a nice rental property. The real estate generates, say, $30,000 a year of rent after expenses. Suppose that last year the building was worth $500,000 but that now, amidst real estate euphoria, it’s worth $1 million, even though the rental income is no higher. Are you better off? MORE FOR YOUThe Best Places To Retire In 20209 Defenses Against The Biden Tax IncreasesThe Funds With The Smartest Investors, And The Funds With The Dumbest

Yes and no. If you are about to sell the building and use the proceeds to acquire a sailboat, you are better off by a factor of two. If, on the other hand, you’re planning to hold onto the real estate and cover living expenses with the income from it, you are no better off at all.

A new retiree sitting on a pile of stocks and bonds is midway between those extremes. If your assets need to last you 30 years, but not forever, you are half landlord and half sailor. Like a landlord you are earning a current return on your assets, and that current return drives a lot of your spending power. But you are also, like the sailor, selling off a little of the property every year, and property prices matter for that.

In November 2013 the S&P 500 index hovered around 1,800, and index earnings came to $100 for the year. The index has climbed to 3,600 but earnings are down, to an estimated $94 for 2020. That equates to a current earnings yield of 2.6%, down from 5.6% in 2013. The earning power of equity capital is meager, and that makes for meager future returns in the stock market.

Yes, earnings will rebound a bit with the arrival of vaccines and the resumption of a normal economy. But they won’t double next year. They will remain small in relation to today’s stock prices.

The story is the same in fixed income. Yields on long-term Treasuries (1.6%) are a bit less than half as high as they were seven years ago (3.8%). If you bought some of those bonds in 2013 you’re looking at a handsome gain in their value, but this gain does nothing for the interest coupons on the bonds. If you are trying to live on the interest without dipping into principal, you are no better off.

Your IRA statement probably says that you are twice as rich as you were in 2013. Nice, but don’t get carried away. The percentage of the account you can spend annually has gone down. That is the consequence of low bond yields and low stock earnings yields.  

What’s a safe withdrawal rate now? That’s a matter of debate. A 3% draw seems defensible; at this level, I think, you can afford to give yourself raises to keep up with the CPI. It’s appropriate for a newly retired 67-year-old who might live to 97, or whose spouse might live until 2050.

That is, a $1 million account, somewhat conservatively invested 60% in stocks and 40% in bonds, is good for $2,500 a month to start. If inflation comes to 2%, you can step up to $2,550 a month the second year.

You could go higher than 3% if you knew there wouldn’t be any stock market crash early in your retirement, and if you also knew there wouldn’t be any burst of inflation between now and 2050. But you can’t know either of these things.

You could also go higher if you were emotionally equipped to cut your spending during a crash in stock or bond prices. Belt-tightening would protect more of your principal from the irrecoverable damage of selling in a down market. Not everyone is so equipped.

Related: Expected Returns 2020-2040 Follow me on Twitter

William Baldwin

William Baldwin

I aim to help you save on taxes and money management costs. I graduated from Harvard in 1973, have been a journalist for 45 years, and was editor of Forbes magazine from 1999 to 2010. Tax law is a frequent subject in my articles. I have been an Enrolled Agent since 1979. Email me at williambaldwinfinance — at — gmail — dot — com.



Rob Berger

The Coronavirus has plunged us into the first bear market in more than a decade. Here’s how those in or nearing retirement can handle their investments to navigate the market crash with confidence. RESOURCES Vanguard Advisory Services: https://investor.vanguard.com/financi… Fee-only Advisors: —https://planvisionmn.com/https://rickferri.com/ Personal Capital: http://bit.ly/2IXHuFr Morningstar: http://bit.ly/3dgN1VI 4% Rule–William Bengen’s original 1994 article: http://www.retailinvestor.org/pdf/Ben… ABOUT ME While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I’m the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money. I’m also the author of Retire Before Mom and Dad–The Simple Numbers Behind a Lifetime of Financial Freedom (https://www.retirebeforemomanddad.com/) LET’S CONNECT Youtube: https://www.youtube.com/channel/UC9C1… Facebook: https://www.facebook.com/financialfre… Twitter: https://twitter.com/Robert_A_Berger DISCLAIMER: I am not a financial adviser. These videos are for educational purposes only. Investing of any kind involves risk. Your investment and other financial decisions are solely your responsibility. It is imperative that you conduct your own research and seek professional advice as necessary. I am merely sharing my opinions.

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