The Most Amazing Retirement Chart You'll Ever See

There are few psychological forces more powerful than hedonic adaptation. As former Fool Morgan Housel once described this phenomenon: "What we always dreamed of becomes nothing more than normal life once we achieve it."

This helps explain why winning the lottery only produces a short-term happiness bump, and becoming a paraplegic doesn't mean lifelong misery. In the world of personal finance, the implications here are enormous.

But what if we found something -- anything -- that could provide lasting benefits for your happiness? Could such a thing exist? According to a 2015 paper from researchers  at the National Bureau of Economic Research (NBER), there is such a thing: retirement.

A little background

In an earlier piece I wrote here at The Motley Fool, I argued that our two standard approaches to motivating readers to save for retirement don't really work:

The goal, I argued, should be to simply show non-retirees what retirees feel like once they've exited the mandatory-work world. The results, according to a study from Age Wave and Merrill Lynch, spoke volumes.

But believe it or not, that's not actually the "amazing" retirement chart I want you to see.

More powerful than originally thought

After publishing the aforementioned chart the first time, I heard from a number of folks who thought the sudden surge in free time and leisure in retirement was often a boom in the short term but didn't lead to any meaningful changes in happiness over the long run.

That's where our friends at the NBER come in. They noticed a glaring problem with current research -- which often finds retirement to be a time of loneliness and isolation: "Retirement decisions are endogenous," NBER says. "Individuals who experience negative shocks to health or life satisfaction disproportionately self-select into retirement."

In other words, retirement doesn't cause unhappiness. It's the escape mechanism for the already unhappy.

Using data from the Health and Retirement Study (HRS), and accounting for this self-selecting bias, the authors found that retirement "has a much larger impact on life satisfaction" than previously found. Specifically, those who complete the HRS were asked to rate their agreement with the following three statements, from 1 (strongly disagree) to 7 (strongly agree):

  • In most ways, my life is close to ideal.
  • The conditions of my life are excellent.
  • I am satisfied with my life.

Here's the chart that's so important. To understand what it means, you need to know what you're looking at: regression analysis.

If you have a score of 1.0, it means that one variable -- here, how long you've been retired -- explains 100% of the variability in how people respond to the three questions. A score of zero means the two have absolutely nothing to do with one another. Importantly, all of the scores I'm showing you are statistically significant at the most rigorous standards.

What does this mean? It means the happiness you experience upon retirement doesn't diminish -- it actually increases!

Thus, you don't hedonically adapt to the freedom of time you experience. And that's no small deal. It helps explain why I've long believed we should stop encouraging folks to save for retirement and instead focus on financial independence -- which you can reach as early as your 30s. It's like showing people how great it feels to exercise, instead of just trying to stop them from being obese: They are pulled, instead of pushed, into the more immediate rewards.

I hope this serves as an impetus to prioritize your own retirement and financial independence savings. Scientific studies show that the freedom that comes with being retired and financially independent makes you increasingly happy over time.

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