The impact of disparities in socio-economic status on the health of older people is an important issue for policy makers in the context of population ageing. As older people live in different types of economic circumstances and because, as people age, their desires and needs are different to those of younger generations, measures of living standards need to be appropriate for older people. This paper reports on the validation of a measure of living standards for older people based on Sen's Capability Approach. Using this approach, living standards are conceptualised as varying from constraint to freedom rather than from hardship to comfort. Using the New Zealand Longitudinal Study of Ageing omnibus survey of 3,923 adults aged 50–87 years, the validity of the measure was assessed. The results indicate that this measure assesses what older people are able to achieve. In addition, this measure discriminates better at the higher end of the living standards spectrum than an existing measure that assesses living standards from hardship to comfort in terms of what people possess. From this, a short form of the measure has been developed which offers a conceptually based and valid measure useful for survey research with older people. This measure of living standards provides future avenues for improved understandings of socio-economic position in later life.