How Much Money Does It Take to Be Happy?

Sociologists Calculate How Much Money It Takes to Maximize Happiness

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It isn't unusual for people to ask themselves the question, "How much money does it take to be happy?" The next time this thought crosses your mind, don't take it lightly because the answer is important, especially as it pertains to the management of your investment portfolio. The reason? The first step to financial success is clearly defining what it is you want. Are you striving for a comfortable retirement?

Are you hoping to build your dream home entirely debt-free? Do you wish to travel the world in a private jet? The answer to these types of questions will determine the approach you might want to take when it comes to constructing, funding, and protecting your investment portfolio.

One assumption you might frequently encounter is the notion that happiness is synonymous with being rich. One problem with that assumption is that even members of your own family might very well have different expectations for what "rich" is. Contemporary sociologists such as Dennis Gilbert define "rich" as those who live off investments and not occupational-driven income. By this standard, a doctor, even one earning $1 million a year, isn’t as rich as someone who earned $1 million from stocks, bonds, real estate, copyrights, or other passive income sources. The reason has to do with time. The investor can sit at home and make money, while the doctor stops receiving a paycheck if he fails to go into work.

He's only paid if he continues to sell his labor. Others might define being rich by entirely different metrics and measurements.

It Turns Out, Most Investors Don't Need to Be Rich to Be Happy

The truth is, most people have no desire to be rich when it really comes down to it. This was backed up in a major peer-reviewed study by Daniel Kahneman and Angus Deaton from the Center for Health and Well-Being at Princeton University that proved money does buy happiness up to $75,000 per year.

In other words, once you make $75,000 per year, your day-to-day experience doesn’t improve very much as your income grows. Your "life satisfaction" does — that is, how you feel about what you’ve accomplished. The degree to which you love your work is icing on the cake. It seems rational that most new investors should focus on how to earn that much each year, if they don’t already.

That means a successful investing program is one that is designed to help you:

  • Live debt-free. If you have no debt, it's much more difficult to go bankrupt.
  • Avoid financial stress by constructing, maintaining, and protecting a diversified collection of high-quality investments that provide you with the lifestyle you want.
  • Maintain adequate insurance coverage so you don’t have to worry about losing everything if something goes wrong.
  • Have diversified income sources so you don’t rely on a single job or source of income that could put your family at risk if it disappeared overnight.

Figuring Out a Safe Withdrawal Rate to Be Happy With Your Income

If it takes $75,000 per annum to be happy, how much money do you need in your portfolio to produce that level of cash flow? The answer: It depends on the asset classes you've selected.

For example, in the Midwest in late 2016, it might be possible for a debt-free investor to achieve such a thing with a portfolio of rental houses or commercial office buildings valued at somewhere between $800,000 and $1,000,000, something that would be all but an impossibility in a market like Southern California or New York. If you were willing to utilize a conservative amount of leverage, you could pull it off with less equity; one of the reasons real estate is so beloved by the self-made rich.

Alternatively, a diversified portfolio of stocks and bonds might require anywhere from $1,875,000 to $2,500,000 if following the well-respected statistical guidelines of drawing down no more than 3 percent to 4 percent of the portfolio value each year (to learn more about the topic, read What Is a Safe Withdrawal Rate for Retirement?

). It follows that once you move beyond that, more money will not necessarily mean more happiness.

For a typical working family with a median annual household income in the mid-$50,000s, the portfolio would only need to bring in $25,000 or so in cash flow to cover the gap to maximum financial happiness. This makes the task much less daunting if you are relatively young, especially if you take advantage of 401(k) employer matching as well as fund a Roth IRA, enjoying substantial tax benefits as you accumulate capital.