When people tell me they don’t want a retirement plan because the world is going to end, or the market is too high or low — well, I have many things to say to that. Mostly, I tell them to bet that we will survive the current challenges, and start saving now for later in life, when unknown challenges will arise. A retirement plan is a tax-efficient and easy way to move funds in your earnings years for your retirement years. Not only will you be happy that you have a few dollars for when you stop working, but you will also appreciate those dollars more at 70 than at 40!
Don’t believe me? Here’s how it works.
The value of money increases depending on the market of course, but it also depends on our present needs, less so on our present desires. The principle is simple: A dollar has more value the hungrier we are. However, once you are fed, sheltered, and clothed, everything changes!
“It is true that poor nations become happier as they become middle-class nations. But once the basic necessities have been achieved, future income is lightly connected to well-being,” says New York Times op-ed columnist David Brooks in a 2010 article. He argues that the saying “money can’t buy happiness” is true, and that age determines happiness. “On a personal scale, winning the lottery doesn’t seem to produce lasting gains in well-being. People aren’t happiest during the years when they are winning the most promotions. Instead, people are happy in their twenties, dip in middle age, and then, on average, hit peak happiness just after retirement at age 65,” he adds.
But we all know that money has a little something to do with happiness. Daniel Kahneman, a Nobel Prize winner and one of the founders of the now-popular field of behavior economics, points to research showing that maximum happiness comes when you earn as little as $60,000 annually, and that earning more than that barely affects your happiness at all.
Assume what Brooks and Kahneman say is true: We are happiest in our mid-twenties and just after retirement. We are the most appreciative of money when we earn just above $60,000 a year. We tend to collect the most money, however, at a time when it contributes less to our happiness.
In our thirties, forties, and fifties, we are generally stressed with other life issues, like health, applying to schools for our kids, etc., and we are earning enough money to feed our family so that is not our primary concern. (Unless we aren’t and then it obviously is the main concern, which is an entirely different ballgame.)
Now, here’s how to take advantage of this knowledge to ensure maximum happiness at all times. If we take a little of our earnings during the time when we worry about it less (between our thirties and fifties) and save it for the future, we will ensure maximum happiness throughout our lives. We will enjoy the money more when we are relaxing in retirement, and it is there to keep us fed! After retirement, most people live on 75 percent of their previous annual earnings. This, obviously, means that once you’ve retired, you will want to do more in your free time with less money than you had when you were busy with work. During midlife, when money is less important to your happiness, if you save some for retirement, when it is more important, you’ll have done yourself a profound favor.
The “extra” money in our lives can be hard to find. Look at enjoyment from a different angle. Sure, a $1,000 vacation or shopping trip is always fun, but so is a lovely home-cooked meal shared with close friends. We don’t always have to favor the inexpensive option, but being conscious of that choice will empower you to live a more content life. Once our basic needs have been met, happiness becomes harder to “buy.” Take some of that money you spend on frivolous things and save it for when it will be more valuable to you.
So if you assume the world won’t end before you die, if you have a job and a life, and you acknowledge the merits of redistributing money to when it is more valuable, a retirement plan is for you.
We practice living well in the moment to fully enjoy the present, but we are always aware of the need to be clear and focused enough to appropriately deal with the next moment when it arrives. Saving a portion of your earnings for the future — where you’ll enjoy it more — is among the most effective ways to encourage a meaningful evaluation of your present situation while also enhancing your later years.
Robert Thomas is a member of the DailyWorth Connect program. Read more about the program here.