Plan for a rich life rather than a big pension pot

It is easy to believe that the secret to a comfortable retirement is having lots of money, or to retire once your pension savings reach a certain figure. The belief is that the bigger the amount, the better the retirement.

But having enough money does not necessarily mean you will have a better life. Research into the relationship between money and happiness suggests that the way we use our wealth can be just as important, and even more important.

Read: South Africa’s happiness index jumps amid Bafana’s historic World Cup run

Kate Moodley, franchise director at Discovery, highlighted this in a recent presentation at an Old Mutual investment conference. The presentation cited well-known research into the relationship between income and happiness.

One of the most widely quoted studies on this was published in 2010 by Daniel Kahneman and Angus Deaton, both of whom previously received Nobel prizes for economic research.

The researchers found that while people’s assessment of their lives continued to improve as income increased, day-to-day emotional well-being appeared to stop improving once income reached a certain point.

They found that about $75 000 a year made people happy and more money would not make people much happier.

Moodley notes that the $75 000 is a US figure anchored to US salaries, and should be seen in that context and not converted to rands. (For the curious, it converts to around R1 247 000 at the current rate of exchange, but bear in mind that the research was done in 2010).

This particular finding became popular and was often interpreted as meaning that there is a point beyond which having more money does not make people happier.

Popular idea, but simplistic

Subsequent research showed that the story is more complicated.

In 2021, Matthew Killingsworth, a senior fellow at the Wharton School of the University of Pennsylvania, published research using a much larger dataset and a different way of measuring happiness.

He built a mobile app that allowed people to track their happiness, not unlike a fitness app.

It collected 1.7 million data points, and his findings showed that experienced well-being continued to increase with income beyond the ‘ceiling’ of $75 000 per annum.

He also found that the relationship was linear. An increase in income from $40 000 to $80 000 per annum made people happier by the same extent as when income rose from $80 000 to $160 000 per annum.

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Contradictory results leads to collaboration

In additional notes to her presentation, Moodley says these two studies resulted in a very unusual situation in that the respective research teams agreed to share their data and analyse it together, to see what caused the conflicting conclusions.

“Rather than argue in print, Kahneman and Killingsworth agreed to re-analyse the data together.

“Barbara Mellers, a decision scientist at the University of Pennsylvania, served as a neutral arbiter whose job was to keep the analysis honest and referee any disagreement about what the data showed.

“Kahneman had championed this approach for years. The idea is simple: two researchers who disagreed would agree in advance that a new analysis would settle the question, then run it together.

“It is far rarer in academia than it should be, and it is worth saying so,” says Moodley.

The contradiction between the view that enough is enough and the other view that more money is always better was eventually examined by Killingsworth, Kahneman and Mellers in a 2023 academic paper.

This study found that the earlier conclusions were both essentially right, but that they were looking at different groups of people.

Your baseline has enormous influence

The difference – in simple terms – is that people differ and more money made happy people happier, but more money will make unhappy people only a bit happier and only up to a certain point.

“For the least happy 20% of the population, happiness increased with income up to roughly $100 000 before flattening out,” says Moodley.

“For the majority of people, however, happiness continued to increase as income rose.

“For the happiest 30%, the relationship became even stronger at higher incomes.

“For someone who is unhappy because of financial problems, more money can make a significant difference.

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Read: Discovery data reveals why South Africans are dipping into their two-pot savings

“But once the financial problems have been solved, more money may not address the real reason for the unhappiness.”

Retirement planning

Moodley says this research is particularly relevant to retirement planning.

“There is a tendency to focus almost entirely on the size of the pension fund and whether it will be sufficient to provide an income for the rest of a pensioner’s life.

“That is obviously important, but it often overlooks the question of what the money is actually for.

“A person can spend decades building a substantial retirement fund only to discover that they have not made any plans for how they will spend their time,” she says.

“There is what could be called the ‘one more year’ syndrome.

“People who have spent 30 years working can find it difficult to suddenly stop working. There may also be no clear plan for the time that follows.

“People at the point of retirement find that they have a detailed financial plan, but nothing planned for the Monday morning when they no longer have to go to work,” she says, “and then decide to postpone retirement one more year.”

The goalposts can also move. The amount of money that seemed sufficient for financial freedom at 45 will look insufficient when one turns 55 and 65.

“There are, of course, legitimate reasons for this concern. People worry about longevity, healthcare costs, frail care and the possibility of running out of money,” says Moodley.

“A sensible retirement plan should address [these concerns] with structure, including a cash buffer, spending guardrails and a floor of guaranteed income.

“However, a good plan will assure that people also have the confidence to spend some of the money they have accumulated,” she says.

“Accumulating money is only one part of the equation. How that money is spent has a major impact on well-being.”

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How to ‘spend with confidence’?

One suggestion is to buy experiences rather than simply accumulating more things, says Moodley, noting that a memorable trip can continue providing value for decades through the memories it creates.

She calls it a “memory dividend”.

Read: Rising costs change how, not whether, South Africans travel

“An experience pays for itself twice. First, there is the experience itself. Later there are the memories of that experience.

“A holiday at 35 can potentially be remembered and enjoyed for the next 50 years. The same trip at 75 does not have the same opportunity to generate decades of memories.”

Then there is the reality that people need time, money and health to enjoy certain experiences.

“Young people might not have time or money to go on a long trip, being occupied with work and raising a family. Pensioners have time and money, and [can] be healthy to enjoy it if they don’t wait too long.

“This does not mean people should recklessly spend their retirement savings. It means financial planning should recognise that money has a purpose and that the timing of spending matters,” she says.

Read: You don’t choose your birthday, but it could cost you in retirement

“The most useful question for someone approaching retirement is not simply to ask how much money I need to retire, but rather what I want my life to be like.

“After all, there is little value in having a very large pension fund if you never get around to enjoying it.”

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