Swedroe: Does Money Buy Happiness?

April 26, 2019

There’s a cliché that money can’t buy happiness. Is that true? Thanks to research from Nobel Prize-winning economist Daniel Kahneman and Angus Deaton, authors of the 2010 study “High Income Improves Evaluation of Life But Not Emotional Well-Being,” we can answer the question: It does—to a point. Kahneman and Deaton found that happiness tends to increase along with income up to about $75,000 a year.

They found that the lower a person's annual income falls below that benchmark, the unhappier he or she feels—having to worry about putting food on the table, providing decent shelter, and having access to good health care.

However, no matter how much more than $75,000 people make, they don't report any greater degree of happiness. The authors concluded that “high income buys life satisfaction but not happiness, and low income is associated both with low life evaluation and low emotional well-being.”

The $75,000 benchmark, of course, depends on where you live. Updating the data, a 2016 study by Doug Short of Advisor Perspectives found that if you reside in a place like Hawaii, where the cost of living is relatively high, a household needs to make about $122,000 per year before incremental income doesn’t really translate into more happiness. In Mississippi, by comparison, the threshold at which more money stops making you happier is only about $66,000.

Understanding how income and wealth impact happiness plays an important role in retirement planning. It helps determine both your need to save and how much risk you need to take (how much you need to allocate to risky assets). Together with return assumptions, it will help you determine how much wealth you need to accumulate to be happy in retirement.

Confirming Data

Thanks to the Spectrem Group, a research and consulting group focusing on the wealthy, we have some new insights into the relationship between wealth and happiness. In their April 2019 Millionaire Corner Monthly, Spectrum reported on the findings from a survey of 700 wealthy investors (minimum wealth of $100,000, not including the value of their home, all the way to $25 million) who were asked to rate their level of happiness on a 0-100 scale. Here is what they found.

Investors with a net worth between $100,000 and $500,000 had a happiness score of 63.8. Happiness soared to 76.9 for investors with a net worth of between $10 million and $15 million. However, investors with a net worth between $15 million and $25 million scored their happiness level at just 71.9, well below that of their $10 million to $15 million cohorts.

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