CLAY COCKRELL has an unusual job. He describes himself as a psychotherapist treating the “1% of the 1%” in New York City. From this vantage point, Cockrell has gained unique insights into the lives of the extremely wealthy. What conclusions does he draw about money and happiness? “If you have an enemy,” Cockrell says, “go buy them a lottery ticket because, on the off-chance that they win, their life is going to be really messed up.”
This observation fits well with the aphorism that “money doesn’t buy happiness.” There’s a growing body of research supporting this view. Lots of professional athletes run into financial distress, despite earning millions. Lottery winners seem like a particularly unfortunate lot. Even the neighbors of lottery winners end up worse off.
But those who aren’t wealthy are quick to rebut claims that money doesn’t buy happiness. Having too little money can also carry negative consequences.
If both too much and too little money can be problematic, where does that leave us? In researching this question, I wasn’t surprised to learn that the single most popular class in the 318-year history of Yale University is called “Psychology and the Good Life.” The topic: happiness and how to achieve it. Each semester, more than 1,000 students enroll. This suggests that most people’s ultimate goal isn’t to accumulate the most dollars. Rather, it’s to accumulate maximum happiness.
Does this mean there’s no connection between money and happiness? Far from it. It’s just that the relationship is complex. Consider three insights from the research:
1. Money does indeed buy happiness—but to a limited extent. If you earn $40,000, you’ll definitely feel happier if you get a raise. But those benefits top out more quickly than you might expect—at around $75,000. People who earn $500,000 are indeed happier than those who earn $50,000, but not 10 times happier. The same applies to retirees: Those with $1 million in the bank are certainly happier than those with $100,000, but the happiness benefits aren’t proportional to the sum involved.
The lesson: You should work hard and save diligently, but be aware of what’s known as the “arrival fallacy.” This is the tendency to say to ourselves, “I’ll be happy when _____.” Clay Cockrell describes one patient who had $500 million, but really wanted to get to $1 billion to feel truly secure.
That’s an extreme case, but you get the point: We would all like a few more dollars, but the evidence suggests that—unless you’re truly destitute—it probably won’t help. While you might find this conclusion discouraging, I think it’s comforting. It means that the road to greater happiness doesn’t necessarily require more money.
2. How you spend your money is far more important than how much you have. According to retirement researcher Michael Finke, the best way to spend your money is in ways that bring you greater socialization. We should invest in friendships, even if it means traveling long distances. That’s money well spent. Time with grandchildren also increases happiness.
While Finke wouldn’t recommend buying an expensive toy like an antique car, he points out that the litmus test should be socialization. If you drive the car by yourself, it does no good. But if it brings you into contact with other classic car enthusiasts, that could be beneficial.
3. In retirement, guaranteed income may be more valuable than higher income. According to a happiness survey by Towers Watson, workers with pensions, annuities or other reliable income sources experience lower levels of anxiety than those who rely entirely on their investment portfolios during retirement, regardless of the portfolio’s size. This is an extremely important point. In many cases, people make financial decisions only through the lens of maximizing wealth. But what this study shows is that maximizing peace of mind is actually a more important goal.
How can you structure your finances to achieve greater peace of mind? There’s a number of ways—and often they run contrary to conventional wisdom. Annuities, for example, have a bad reputation due to their fees, complexity and inherent longevity gamble. But if you want a secure retirement, a low-cost annuity might not be such a bad idea.
By the same token, many investors today prefer to maintain higher allocations to stocks, instead of earning thin yields in the bond market. But if you don’t need to take additional stock market risk, maybe it makes sense to adopt a more defensive posture. In other words, don’t worry about forgoing potential upside in the stock market. Instead, focus on the increased peace of mind you’ll achieve in the bond market.
Many years ago, I knew an investor who preferred to keep $1 million in his checking account at all times. While conventional wisdom would say this was irrational, I always felt it made perfect sense. You alone are the best judge of what will help you sleep at night.
Adam M. Grossman’s previous articles include Yet Another Reason, Peter Principles and But Will It Work. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.