• John Anderson, Head of Strategic Development

The relationship between money and a happy retirement

Financial security is vital in retirement, but having enough money doesn’t guarantee that you’ll be content.

In addition to being financially secure, contentment in retirement will depend on:

  • your lifestyle

  • how well you prepare emotionally for the changes that retirement will bring

  • what you do with your time

It’s important that you have a fulfilling retirement, not just lots of money.

Everyone’s needs in retirement are different; your needs are specific to you. You need to decide on all your needs and objectives for retirement before you actually retire.

At the same time, you should be concerned about your financial security. Historically, a savings target for retirement has been a pension of between 60% and 75% of your final salary.

However, South African research indicates that you’ll probably need an income in retirement of more than 80% of your final salary. And, depending on your standard of living, even 90% may not be enough.

Once you retire, you may spend:

  • less on transport to and from work, for example

  • more on healthcare, where costs are increasing by two or three percentage points above inflation every year

But having enough money in retirement will not necessarily buy you happiness.

International research has found that the United States has the world’s highest income per head of population, but it doesn’t have the longest life expectancy. This shows that money doesn’t account for everything.

Even in developed countries, a high level of income inequality results in more social and health problems. This is also true of South Africa, which is one of the most unequal societies in the world. A consequence of inequality is that middle- and low-income people live beyond their means by spending money on luxuries for aspirational reasons and to achieve instant gratification.

We often spend more on things we don’t need than on the essentials – for example, a big-screen TV and a satellite TV subscription instead of good food and healthcare.

In retirement, it’s important to prioritise your spending according to your needs and financial resources.

You should interrogate your motives for wanting to buy something and distinguish between luxuries and necessities.

A good way to achieve contentment and financial stability before and during retirement is to base your spending on Maslow’s hierarchy of needs, which is a theory of human motivation proposed by US psychologist Abraham Maslow in 1943.

The hierarchy of needs is often portrayed in the shape of a pyramid with the largest, most fundamental levels of needs at the bottom and the need for self-actualisation (the need to be good, to be fully alive and to find meaning in life) at the top.

In designing your budget, you need to start at the lowest tier of the pyramid and work your way up.

The five tiers of the pyramid are:

  1. Physical needs: Your first priority is to have food, accommodation and access to basic healthcare.

  2. Safety: You must be able to protect yourself, your assets and your income. This requires spending on, among other things, homeowner’s insurance and medical scheme cover, and having enough savings to provide a basic level of income if you live longer than expected.

  3. Belonging: We have a need to belong to a social group, such as a family or a community who shares our beliefs or interests. At this level of the hierarchy, you spend money on other people, such as your family, and on entertainment and luxuries.

  4. Esteem: We want to be valued by others. This may involve spending on things that make you feel good about yourself, such as hobbies and sport.

  5. Self-actualisation: This may require spending on philanthropic causes, to help those in need.

Many people don’t live according to this hierarchy, because living in an unequal society has a psychological impact on spending habits. For example, some retirees don’t eat nutritious food, but they avidly watch television or spend money on things that satisfy higher-level needs. Ideally, they should focus on meeting their lower-level needs first.

How you spend your money in retirement will determine your happiness. Having more money doesn’t mean you will have a happier retirement.