Money doesn't buy happiness in retirement

By Liz Pulliam Weston

The most important predictor of whether you'll be happy in retirement may not be how much money you'll have or how healthy you'll be.

The deciding factor may well be whether your decision to retire is voluntary.

At least, that's the conclusion of a study published by the Center for Retirement Research at Boston College. The researchers combed through profiles of 22,000 Americans and found that while money and health are important to retiree happiness, what mattered more was whether retirees had control over when they left work.

"The biggest impact on how satisfied people were with their retirements … was whether they wanted to retire at the time they did," said Keith Bender, a University of Wisconsin economics professor and the study's co-author. The "voluntariness" of retirement "plays a big role, even after controlling for other factors like income."

A common problem

Being forced out of the workplace before you're ready is, unfortunately, a reality many of us are likely to face. A full 40% of the retirees polled by the Employee Benefit Research Institute in 2003 had to retire before they'd anticipated.

What usually ushers people out the door prematurely are health problems and layoffs. A full 41% of those polled by EBRI who said they retired earlier than planned did so because of illness or disability, said EBRI Chief Executive Dallas Salisbury. Another 34% cited changes at work, including downsizing and closures.

Early retirement, planned or unplanned, is actually the norm. Half of all workers retire by age 62, according to the Social Security Administration, and fully 72% receive reduced benefits because they retired before age 65.

The trouble with unplanned early retirement

Unplanned early retirement, though, can cause a number of problems that can lead to unhappiness in retirement:

You have less time to save -- and a longer retirement period to fund. Many people hope to make up for lost time by saving prodigiously in the last few years before they retire. Even those who have been saving all along find a few extra working years to accumulate savings can be enormously helpful in funding their retirement. Losing those years can lead to a substantially lower standard of living.

Your benefits from Social Security and pensions are usually lower. Traditional pensions are typically calculated based on your salary during the final years of your working life. The older you are when you retire, the higher your salary and thus the bigger your benefit. Retire early, and your pension payoff takes a hit.

Similarly, you can qualify for Social Security benefits at 62, but the amount you get will be substantially lower than if you could have held out to full retirement age (currently 65, but that will be rising to age 67 for those born in 1960 and later). Early retirees currently take a 20% hit on their benefits, while those whose full retirement age is 67 will take a 30% cut if they retire at 62.

You may not be psychologically ready for the transition. Our jobs can give us self-esteem, status or simply a way to organize our time. Losing our jobs can mean losing all that, and the adjustment may be tough, even for those who plan well. Retired attorney Donald Olson of Newport Beach, Calif., planned his early retirement, but told me he was surprised at how he felt guilty at not getting up with the dawn and daunted by the challenge of filling his time with productive activities.

"It's about preparedness, knowing what you're going to do next," Ralph Warner, a retired attorney, makes the point eloquently in his book "Get a Life: You Don't Need a Million to Retire Well." "People who have thought about it and who have made plans about what they want to do are usually off like Energizer Bunnies."

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