Free advice from the far side: a retiring economist’s ake on the “U-shaped curve of happiness”

Jim Whitney, June 22, 2014

The Seven Ages of Man

…The sixth age shifts

Into the lean and slippered pantaloon,

With spectacles on nose and pouch on side;

His youthful hose, well saved, a world too wide

For his shrunk shank; and his big manly voice,

Turning again toward childish treble, pipes

And whistles in his sound.

Last scene of all,

That ends this strange eventful history,

Is second childishness and mere oblivion,

Sans teeth, sans eyes, sans taste, sans everything.

William Shakespeare, As You Like It1

Before there was the U-shaped curve of happiness, there was…

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My “legacy” lecture

• My topic• My timing• My credentials

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My game plan: to divide our time into quarters:

1. The U-shaped curve of happiness

2. My personal journey along the U-shaped curve of happiness

3. Questions and answers

4. Happiness at home and abroad: key findings from the new field of happiness research

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Consider this an opportunity for some“marginal advice”

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Part 1: The U-shaped curve of happiness

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How do researchers determine how happy someone is?

1. Usually, they just ask people—massive surveys

2. Exactly the same survey everywhere and every time

3. Example: Gallup-Healthways Well-Being survey: every year since 2009. 160 countries, 1,000 people each year in each country. Overall self-evaluation question: Please imagine a ladder with steps numbered from 0 at the bottom to 10 at the top. The top of the ladder represents the best possible life for you and the bottom of the ladder represents the worst possible life for you. On which step of the ladder would you say you personally feel you stand at this time?

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Researchers then try to figure out why happiness differs across survey respondents:

What makes people happy in the first place?

Should you go to college?

Should you get a job?

Should you get married?

Should you have children?

Should you exercise?

Should you eat lots of fruits and vegetables?

Should you retire by 66?

How much income should you make?

Should you be a man or woman

Yes, good for you

YesYes, at least so far

Only if you want to

Yes

Yes

Not completely

The more, the better

Woman

Here’s how each of these compare in contributing to happiness:

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80K

v. $

40K)

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ale

Impact of key factors on happiness ratings

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So, what’s with the U-curve?• It appears everywhere

researchers have looked • Happiness starts high in early

adulthood, declines to the “mid-life” crisis in the 40s to early 50s, then rises afterwards

• It exists in practice, so can it exist in theory?

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A plausible story

• Middle years are the most stressful: financial responsibilities, child rearing, job security, etc.

• NAS researchers took factors like those into account (female, child at home, unemployed, partnered)

• This chart shows what happened

On top of that, we’re not the only ones with a U-shaped happiness curve:

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An alternative possibility:NAS also found that people’s emotions change with age

Q: Why? A: With experience, our coping skills get better, and we don’t sweat the small stuff as we age.

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Part 2: My life in thirds--and how you can live it

My foundational advice: Don’t settle down too soon or retire too late

• The 30/60/90 rule• Probably not always popular with parents of my

advisees• I was 30 when I started my career at Oxy but

had already fudged some• And now, I am trying to walk the talk and retire

before it is too late. Here is how that is shaping up….

Our spending skews toward travel and activities, so we spend less on tangible items. Here is a picture of our first home, taken when we bought it in 1987:

My mother-in-law described it as “a perfect starter home.”

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Here is where we live now:

My mother-in-law now describes it as “a perfect retirement home.”

We still have the same next-door neighbors too

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And here is the bike we ride to the Y for exercise, ride to the Rose Bowl for yoga, and fold up to fit in our trunk when we travel:

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Our consumption goal is what Keynes called “sufficiency” for the good life. Here’s what that looks like for us:

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55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99

Cons

umpti

onin

dex:

100

.0 =

ave

rage

act

ual c

onsu

mpti

on fo

r fina

l 7 w

orki

ng y

ears

At age...

Projection of affordable inflation-adjusted annual retirement consumption, as a percentage of actual average consumption during my final 7 working years

Scenario 1: With projected return on financial assets

Scenario 2: With no future growth of inflation-adjusted financial assets

Actual

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Overall, we presently feel contented and optimistic so far.

We feel good about how things have worked out. We have been lucky, but we have also made some decisions that helped

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1. We based our retirement savings target on consumption, not income

Benchmark: average consumption over my last 7 work years + a premium for retirement activities in our “early” years Key resource: Economic Security Planner

2. We saved from the start of my Oxy career 1983-2001: 15% (Oxy: 8%; payroll deduction: 7%) 2002-now: 17%+ (Oxy 10%; payroll deduction: 7% to max)

3. We plan to maximize our Social Security income Jim: File and delay at 66; own benefits at 70 Linda: Spousal benefits at 66; own benefits at 70 Key resource: Maximize your Social Security Income

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We made “risky” investments…

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2007

DrJ's inflation-adjusted investment index

Portfolio allocationTypical

Aggressive DrJLarge cap domestic 30% 40%Mid/small cap dom 30% 24%Specialty   12%International 25% 24%Cash and bonds 15% 0%

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…and held onto them through bad times and good

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We saved early and continuously:

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Index of DrJ's inflation-adjusted retirement assets, 1993 = 100.0

Index of retirement savings

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… and trend-adjusted to maintain sanity

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Index of DrJ's inflation-adjusted retirement assets, actual and trend adjusted, 1993=100.0

Index of retirement savings

Trend-adjusted index

We decided to retire once we had reached our retirement assets goal:

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0

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140

55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99

Net

Fin

anci

al A

sset

sind

ex: 1

00.0

= A

ctua

l NFA

one

yea

r bef

ore

retir

emen

t

At age...

Projection of inflation-adjusted net financial assets (NFA), as a percentage of actual net financial assets one year before retirement (Dec. 2012)

Scenario 1: With projected return on financial assets

Scenario 2: With no future growth of inflation-adjusted financial assets

Actual

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And that brings us to where we are now, as we head into our Oxy after-life

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Part 3: Happiness at home and abroad: key findings from the new field of happiness research

• Economics is all about happiness and well-being• How we have measured well-being in the past• Why change?

1. Well-being depends on more than income:clean air, comfortable community, individual freedom, confidence in leadership, fairness

2. The “Easterlin paradox”

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Why did we wait so long?

• Jeremy Bentham• The difficulty of interpersonal comparisons• Modern technology and diffusion of information

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Today’s global data sources are all recent:

1. Gallup-Healthways Gallup World Poll (2009)

2. Bhutan Gross National Happiness Index (2010)

3. Organization for Economic Cooperation and Development (OECD) Better Life Initiative (2011)

4. United Nations World Happiness Report (2012)

5. Happiness Research Institute (2013)

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Recent findings:1. The “Easterlin paradox” appears to be wrong

2. The US performs well, but we’re not #1

• Per capita income• Housing• Health• Safety• Well-being

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So, why aren’t we happier?

UN Report lists “six key variables that we have found to explain three-quarters of the international differences in average life evaluations:”

• GDP per capita• years of healthy life expectancy• having someone to count on in times of trouble • perceptions of corruption• prevalence of generosity• freedom to make life choices

This is the end

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