by Wes Moss
I spend so much time studying financial minutiae that when I have a free moment, I typically try to focus on the other aspects of retirement. Namely, how to help families find happiness in retirement. Ironically, bending over backward to “think different” can sometimes mean I neglect to write about the nuts and bolts of money. Let’s face it, Steve Jobs didn’t spend all his time thinking outside the box. Once in a while, he had to roll up the sleeves of his turtleneck and look at a circuit board. Or, at least, get Steve Wozniak to do it for him. Don’t worry; I’m not comparing myself to the father of the iPhone. I’m just illustrating a point: money is integral to planning for a happy retirement. It doesn’t buy you automatic happiness, but trying to live your best life without it can be very challenging. Therefore, I felt it was time to review my 5 Money Secrets of the Happiest Retirees.
A quick note on the research—my analysis is based on a combination of personal experience and a comprehensive study of more than 1,350 retirees across 46 states. My team and I asked our survey participants more than three dozen questions on a variety of topics: income history, assets, home value and level of mortgage debt, spending habits, sense of purpose, how many vacations they took, what kind of cars they drove, and where they went out for dinner—just to name a few.
Secret #1: Determine What You Want and Need Your Retirement Money For
This secret is about the importance of purpose—figuring out what you want and need your retirement money for. You’ve worked hard and saved money, but what good is it unless you know how you want to spend it?
A quick exercise can make your decision easier. Get out a pen or pencil, and answer these eight questions:
- How many vacations would you like to take each year?
- Where would you like to travel?
- What activities would you like to get involved (or more involved) in?
- What have you been putting off or letting slip that you would like to change, starting this year—especially during your retirement years?
- What does a “perfect day” or even just a “fulfilling day” in retirement look like for you?
- Are there sports or activities you’re interested in playing or learning?
- What communities would you like to be more involved in?
- What are some nonprofits and organizations where you might like to volunteer?
There are no right or wrong answers—the list should look different for everyone. I’m just trying to help you explore why you want money and what you want to do with it. It isn’t about the money. It’s about the money providing the framework for the life you want to live.
The sooner you discover the answers, the sooner you can start working toward your goals.
If you’re getting close to retirement and only have one or two interests outside of work, I have bad news: In my opinion, you could be unhappy in retirement. My studies show that you need at least three core pursuits. As a reminder, a core pursuit is like a hobby on steroids, which drives and fulfills you.
You can’t just work for the dream of having a big pile of money—unless your life’s purpose is swimming in a vast pile of money. If that’s the case, you might have some other problems. Money is necessary but only has the meaning we assign to it. Be the master of that money. Make it serve your purpose and help you achieve what you are genuinely passionate about in your own life. Money may be the fuel, but purpose is the vehicle.
Secret #2: Figure Out How Much Money You Need to Save Before You Retire
Shel Silverstein’s classic children’s book The Giving Tree describes the relationship between a boy and a tree that loves him. “Every day the boy would come to the tree to eat her apples, swing from her branches, or slide down her trunk . . . and the tree was happy. But as the boy grew older he began to want more from the tree, and the tree gave and gave.”
Eventually, the boy exhausts all the resources and gifts the tree has to offer—all that remains is a stump. Visualize this stump when you think about your portfolio, and let that motivate you to keep saving. But how much? You might find that the key to finding the right amount for you and your family is a combination of the 4 Percent Plus Rule of thumb and the 25x Rule of thumb. They work together inversely and can help provide the guidance we need.
In 1994, William Bengen, an MIT aeronautics and astronautics graduate turned Certified Financial Planner™ made a historic discovery. Bengen calculated actual stock returns and retirement scenarios over the last seventy-five years. He found that retirees who draw down 4 percent of their portfolio in their first year of retirement and adjust every year for inflation should likely see their money outlive them. This scenario assumes a 50-75 percent allocation in stocks. Based on his calculations, 80 percent of the time, nest eggs lasted fifty years. In the worst-case scenario, the money lasted thirty-five years.
In 2021, Bengen again broke news. In a Barron’s article, he stated that the figure could potentially be raised to 4.5 percent. One-half of a percent may not seem like much, but that bump gives retirees a 12.5 percent increase in purchasing power and possibly means they could retire months or even years ahead of their current schedule.
Is 4.5 percent the correct number? There’s no exact answer, but during my twenty years of helping people plan for retirement, I’ve found that using a dynamic approach to your nest egg is the key. Use 4 percent to 5 percent dynamically. The chances of that being sustainable are higher if you are willing to make adjustments as needed. That might mean withdrawing less than 4 percent at times, and possibly withdrawing up to 5 percent at other times. And there’s always the three-step dance between math (objective), common sense (subjective), and emotions (very subjective).
The 25x Rule helps simplify the entire financial planning conversation into thirty seconds or less. I first became aware of it when doing a podcast with Carrie Schwab-Pomerantz. She demonstrated how the 25x Rule helps to provide answers for generating income, understanding how long savings should last, and if retirement savings are on track. Take the money you think you need in retirement and multiply it by twenty-five. Once you’ve accumulated that amount, you should be able to retire. Or, as my four boys would say, that’s how much it would take for “Dad to be able to play with us more.”
For example, let’s say you’ll need $5,000 per month to live a happy and fulfilled life.
$5,000 x 12 months = $60,000 per year.
$60,000 x 25 = $1.5 million
Admittedly, this explanation is a bit abridged because you can subtract what you’ll get from Social Security, pensions, rental income, etc. In other words, it should end up being 25x minus those line items.
Of course, saving all that money is not easy, but often the hard work isn’t the root of retirement anxiety. Instead, it comes from not knowing how to get where you want to go. With the 25x Rule, you can use uncomplicated high school algebra to calculate your magic number and then set about obtaining it. From there, the 4 Percent Plus Rule can help you determine how much of the nest egg to spend per year. Of course, everyone’s situation is different, but this provides a guide to help start thinking about retirement.
Sooner or later, every homeowner asks if they should or shouldn’t pay off their mortgage and is bombarded with various complicated responses. Let me offer the most straightforward possible answer: In my opinion, yes. If you are near retirement and can afford to pay off your mortgage, I generally advise retirees to do it.
Many successful retirees I’ve known—those living their dreams—have eliminated or dramatically reduced their mortgage payments before pressing the retirement button. Paying off a mortgage by the time you retire helps to bring enormous peace of mind by substantially reducing the income your nest egg must produce to create a sunny-side-up retirement.
The data from my survey is clear: happiness levels rise as mortgages vanish.
It can be challenging for unhappy retirees to see the light at the end of the tunnel when paying off their homes. They are getting close to, or in the middle of, retirement, yet still trying to find new ways to pay for the mortgage. This reality means they aren’t spending money on the things they want to buy. It’s all going toward nondiscretionary items, with the mortgage being the largest. It’s easy to see why this would make someone unhappy.
Of course, the answer to the mortgage question should differ for people in different stages of life with varying levels of investment risk tolerance. But as you think about your mortgage, contemplate The One-Third Rule of thumb: If you can pay off your mortgage using no more than one-third of your nonretirement savings, consider writing that check today.
Secret #4: Develop an Income Stream from Three of Four Sources, Not Just One
The more “rivers” or “streams” of income you have, the happier you’ll be. Start thinking about this now. Make “multiple streams of income” a mantra and repeat it often. As usual, the proof is in the data. Consider the following results from my research:
- Eighty-five percent of happy retirees have more than one source of income.
- Nearly half of happy retirees have three income sources or more.
- Fifty-seven percent of unhappy retirees report only one source of income.
- The average number of income sources for happy retirees is 2.6.
- The average number of income sources for unhappy retirees is 1.85.
In my opinion, more streams of income equal happier retirees. Stop thinking about a giant river and start focusing on ways to create multiple tributaries. How do you make them flow? It requires relinquishing some control, but that won’t be a problem if you’ve prepared.
Assuming your typical W-2 or 1099 paycheck is no longer flowing, here are some potential sources of income.
- Part-time work
- Social security
- Pension income (state, federal, nonprofit, corporate)
- Rental home income
- Investment income
My research shows that 35 percent of happy retirees have two income sources, and 32 percent have three. The big picture offers one key point: the more (and different) income sources you can rely on in retirement, the more income stream diversification you will have. That leads to a higher sense of safety and security, which is crucial to our well-being and happiness.
Secret #5: Become an Income Investor
There are countless ways to invest. Shelves and shelves of books are filled with all the manners, methods, and philosophies people have invented to make money in the market. It would be disingenuous to insist my way is the only way. Unfortunately, there is no magic formula for wealth. That said, my preferred method is income investing. I’ve used and developed it over many years, and I find it can bring comfort and a level of certainty to an otherwise uncertain practice.
Income investing is a way to generate consistent cash flow from your liquid investments. It comes from three places:
- Dividends from stocks
- Interest from various types of bonds
- Distributions that come from a variety of investments like Real Estate Investment Trusts (REITs) or Master Limited Partnerships (MLPs) —investments that pay distributions but don’t fit neatly in the stock or bond category
Add those three together, and you have your personal portfolio yield. Nothing is guaranteed, but income investing could generate that 4-5 percent cash flow on your investments, that we discussed earlier. The cash flow can be reinvested in your portfolio or used to fund your spending needs. This approach differs from pure growth investing, which relies solely on a rising stock market.
Some people try to explain financial investments with pie charts. I love pie, but the charts don’t taste so good. Instead, I use a bucket system. Why buckets? Because it’s all very liquid. Clever, right? These are the four buckets:
1. Cash Bucket
This is your emergency fund, also known as your sleep well at night (SWAN) savings. Ideally, you should have about six months of living expenses put away in savings, money markets, or CDs. Your yield on this bucket might be lower, but our objective is financial safety and avoiding the need for credit cards when life happens.
2. Income Bucket
Contributions are invested in various types of bonds–Treasury, municipal, corporate, high-yield, international, to name a few. Bonds can range from very safe (Treasury) to somewhat risky (high-yield), with yields that vary accordingly. For this reason, you want to maintain a blend of bond types to maximize return while simultaneously protecting your principal. Depending on that blend, the annual yield for this bucket could fall somewhere in the 1-6 percent range.
3. Growth Bucket
Here, we get into the “capital appreciation” benefits of owning stock in fast-growing companies that typically provide no current dividend income. But as an income investor, you’ll want most of the stocks in this bucket to pay dividends. These types of stocks are often found in one of four categories—consumer staples, utilities, healthcare, and telecommunications. Some established tech companies and energy outfits can provide both growth and income for a win-win proposition. These stocks have yields somewhere in the 2-5 percent range.
4. Alternative Income Bucket
This is a catchall. It contains any asset that isn’t a traditional stock or bond. So, for example, it could include real estate investment trusts (REITs), preferred stocks, master limited partnerships (MLPs), and closed-end funds. This bucket provides higher current income than stocks and bonds but comes with higher levels of risk. I look at the alternative bucket as your overall portfolio yield-enhancer, as yields from these investments can range from 3-8 percent annually.
Remember, “annual yield” for each bucket refers to the amount of cash flow you’ll receive from the group of assets in that bucket. Your total return will be influenced by price fluctuations of the underlying assets in each bucket. And your overall return should differ depending on the percentage of savings you allocate to each bucket, considering things like your risk tolerance and the time you have to spend in the market.
Easy enough? Of course, once you have your buckets in place, you’ll want to keep regular, but not obsessive, tabs on their performance. You’ll also want to adjust as needed in response to life changes and financial goal fine-tuning. Consider working with a trusted, qualified financial planner to discuss how to fund each bucket and how to maximize potential performance.
An old saying goes, “There are many roads to prosperity, but one must be taken.” Another says, “When you come to a fork in the road, take it.” I’ve always been more partial to the spork, but the sentiment still holds. Consider building income investing into your financial roadmap. It may lead you to a happier, more financially free retirement.
I’m optimistic by nature, so I’m going to assume you will work hard to make my five money secrets a reality. They are long-term fundamental pieces of your happiness puzzle, and quite frankly, once you reach economic freedom, you’ll have even more time to dedicate to the things you love.
This information is provided to you as a resource for informational purposes only and is not to be viewed as investment advice or recommendations. Investing involves risk, including the possible loss of principal. There is no guarantee offered that investment return, yield, or performance will be achieved. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. For stocks paying dividends, dividends are not guaranteed, and can increase, decrease, or be eliminated without notice. Fixed-income securities involve interest rate, credit, inflation, and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed-income securities falls. Past performance is not indicative of future results when considering any investment vehicle. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. There are many aspects and criteria that must be examined and considered before investing. Investment decisions should not be made solely based on information contained in this article. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax, or investment advisor before making any investment/tax/estate/financial planning considerations or decisions. The information contained in the article is strictly an opinion and it is not known whether the strategies will be successful. The views and opinions expressed are for educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions,