Throughout this post, I discuss the relationship between two concepts from the field of Economics(?): the Easterlin paradox and early retirement.
Early retirement is a controversial issue in economics and personal finance. I have written about it in an earlier post. Many Americans consider early retirement more than just a chance to have the most relaxing time of their lives. They can either succeed or drown at a crucial point in their lives from this point.
Easterlin paradox, on the other hand (or coincidently?), explores the relationship between income and happiness, or lack thereof.
Economists’ view of Early Retirement
Some economists say those who take early retirement will regret making that decision because people usually retire before their peak earning years, missing a lot of earnings as a result.
They argue that we are poor savers, making early retirement prohibitively expensive. They believe retiring later, at a more normal retirement age, is generally better and safer from a financial standpoint.
Almost half of today’s working families face a loss of standard of living in retirement, according to Boston College’s Center for Retirement Research. If all workers retired two years later, the percentage would drop by roughly 50%.
They state that in the event of early retirement, a benefit is reduced by 5/9 of a percent for each month before the average retirement age, up to 36 months. Moreover, benefits are reduced by five-twelfths of one percent per month when the number of months exceeds 36.
However, can money bring happiness? Some research indicates that the Easterlin paradox theory demonstrates that economic growth in and of itself does little to improve human happiness. However, it is long considered an important goal for society’s prosperity and well-being.
Easterlin paradox theory
Richard Easterlin showed in the mid-1970s that despite steady growth in the U.S. economy, the happiness level had remained unaffected over the previous decades.
At a point in time, the Easterlin Paradox states that happiness varies with income. Both within and among nations, satisfaction does not increase along with rising incomes over time.
There has been much debate about the Easterlin Paradox, but its impact on well-being research and policy implications has been significant.
Easterlin paradox and early retirement
The original Easterlin paradox evidence came from United States data. Over a roughly seven-decade period in which real incomes more than tripled, data on happiness in the United States is flat or possibly even slightly negative. Money does not buy happiness. Go figure!
According to the paradox, the series’ conclusion can reveal long-term trends. Happiness fluctuates along with income when the economy expands and contracts. But income fluctuates around a rising trend line, whereas happiness fluctuates around a horizontal trend. Mathematically speaking the curve flattens and reaches an asymptote, happiness increases with income up to a level and then the effect of money maxes out.
Easterlin paradox theory puts forward a different way of thinking about happiness-money relationships. The happiness-income paradox points out that over the long-term-often a decade, satisfaction does not increase as a country’s income rises.
So, suppose a person takes early retirement for the sake of his health, to spend his time with family, to get free from job stress, to start his own business, or any other positive reason to find his happiness. In that case, early retirement can be beneficial for him.
Many wealthy people have everything they can desire, yet they are not happy and feel stressed. Even they become so upset that they cannot sleep peacefully. Instead of being happy about their money, they regret having money.
Is Early Retirement the answer to the Easterlin paradox?
If money doesn’t bring you happiness, then go find happiness somewhere else!
Even though many economists believe that early retirement decreases the benefits of money and ultimately happiness, this is not under the Easterlin paradox, which says that happiness cannot positively correlate with money.
It is common for people to continue working until they are older to gain reasonable amounts of money and pensions and neglect their health and families. Therefore, getting an early retirement is much better for your health and time with your family.
Therefore, people shouldn’t call early retirement a matter of losing money and making the biggest mistakes that they will regret. Once money doesn’t bring you joy, then go get what’s missing in free time, less stress, pursuing hobbies, etc. Even blogging? (haha)
What do you think?
The original paper:
Citation:
Easterlin, Richard A. 1974. “Does Economic Growth Improve the Human Lot? Some Empirical Evidence.” In Nations and Households in Economic Growth, edited by P. David and W. Melvin, 89–125. Palo Alto, CA.: Stanford University Press.
Link:
https://huwdixon.org/teaching/cei/Easterlin1974.pdf
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