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How Much Money Would Make You Happy?

When It Comes to Your Portfolio, Science Has an Answer


Gold Coins in a Chest

It turns out, it doesn't take a king's treasury to make most people happy. Science has settled on a figure that maximizes human happiness based upon an extensive peer-reviewed study.

As a new investor, you need to define what your goals are. What are your goals? Do you just want a comfortable retirement? Do you want to have your dream home with no debt? Do you want to own a private jet? The answer to those questions will determine the approach you might want to take when it comes to your investment portfolio.

I ask because contemporary sociologists such as Dennis Gilbert define "rich" as those who live off investments and not occupational-driven income. By this definition, 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 is because the investor can sit at home and make money, while the doctor stops receiving a paycheck if he fails to go into work.

Turns Out, Most Investors Don't Want to Be Rich

The truth is, most people don’t want to be rich. 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 that a successful investing program is one that is designed to help you:

  • Live debt-free. If you have no debt, you can’t go bankrupt.
  • Avoid financial stress by having diversified, 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.

The 4% Rule and Your Investments

The statistical rule for new investors is that if you withdraw 4% of your account value at the end of year each, you should be able to survive even another Great Depression. That means it would require a net worth of $1,875,000 to generate $75,000 in annual passive income without ever running out of money ($75,000 divided by 0.04 = $1,875,000).

That means that the average person, based upon research, needs a portfolio worth $1,875,000 to be happy without ever working again. How is that possible? Save $1,165 per month for 35 years at 8%. If you take advantage of 401(k) matching and other programs, you would only have to come up with a portion of that out of pocket.

Alternatively, if you and your spouse have an income of $50,000 per year, you’d only need $25,000 from passive income. Following the 4% rule, that would require $625,000. That would only require saving $303 per month for 35 years at 8%. Again, if you used 401(k) plans or other benefit programs, only a portion of that would have to come out of your own wallet.

The bottom line? If you are an middle-age or young, average American earning the median household income of $50,000 to $55,000 per year, your personal happiness is likely to tap out with a portfolio of $625,000 generating dividends of $25,000 per year on top of your salary, wages and benefits.

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