#180 – Revisiting Five Financial Secrets Of The Happiest Retirees

Wes Moss [00:01:49]:

Ten habits for a healthy, secure, and joyful life. Where we talk about the data behind Hrobs versus urobs, or happiest retirees versus unhappiest retirees. And all that data comes from asking thousands of survey participants about their financial, consumer, and family, and social and life habits, and how those traits correlate to different levels of happiness in retirement. You and I want to be in the hrop camp, not the URop camp. And a great way to start is to nail down the financial habits of atrops. One, these take a long period of time to cultivate and to compound. And starting younger is better. It’s one of the core principles to building wealth.

Wes Moss [00:02:33]:

It takes time. And two, the same money habits that you establish when you’re young, in your twenty s, thirty s, and forty s. They stay relevant forever, as retirement is just the next phase of your finances, the distribution phase, after you spend a lifetime of accumulating assets. So here we go. Here are the five right out of the gate. Number one, happy. And think of it this way. Happy retirees have, or do the following one, at least 500,000 in liquid retirement savings.

Wes Moss [00:03:05]:

That’s the median number. 875,000 is the mean or the average number. And again, more here is fine. Number two, happy retirees have their mortgages paid off or their payoff is within sight. Three hrobs have multiple, multiple streams of income. Four hrobs are tomorrow investors, not really savers, more investors. And five hrobs nail down their budget and spend knowing the 4% plus rule. So let’s dig into each one of these habits.

Wes Moss [00:03:40]:

So, habit number one, we’ve got to have at least $500,000 in liquid retirement savings. That’s a median number, by the way. We can look at the data in multiple ways. If you look at the average of the mean data, it’s higher than that. It’s closer to $900,000 in liquid retirement savings. And what is liquid retirement savings? It means anything that you can quickly convert to cash to pay for something that could be stocks or bonds or mutual funds or money markets, CDs. But $500,000 or half a million dollars, that’s the number that came back from our research data. And it also makes sense in the real world.

Wes Moss [00:04:20]:

If you look at this from a practical cash flow producing perspective, it starts to make sense as well. Now, of course, there are happy retirees with less than $500,000, but I think of that level, this checkpoint is really a critical inflection point, moving from the unhappy to the happy camp. Again, MORe IS FInE. THe AVEraGe is 875,000. But due to what I call the plateau effect, we see significant improvements in happiness levels going from, let’s call it $0 to $250,000 to $500,000. But once we get above that mark, that $500,000 mark, happiness levels tend to trail off or level off. If you were to look at this in chart form, it would show you that in the early stages of accumulation, happiness levels rise a lot, meaning that, let’s say, going from $50,000 in savings to $250,000, that new money buys a lot of new happiness. Or you could call it peace of mind.

Wes Moss [00:05:22]:

But then the More moNey, more happiness Effect begins to level off or plateau. So at a certain point, more money or more savings doesn’t necessarily increase happiness anymore. And of course, everyone’s economic needs vary, and they vary greatly. Some feedback I’ve gotten over the years. $500,000 Is crazy High. West. You can’t expect everyone to save at least that much as a minimum. And then other people tell me $500,000 is nothing.

Wes Moss [00:05:52]:

That’s Crazy low. Now, if it does sound high to you, I wouldn’t panic. I know it takes a lot of time and it takes a lot of hard work to accumulate wealth, but I think this number is certainly much more attainable than what you’ll hear a lot of people espouse or other money folks. Susie Orman, as an example, claims that you need to have at least, at least $5 million in liquid assets to retire. So what can $500,000 do? Well, it can contribute close to two grand a month to your overall retirement. And we’re going to talk about the 4% plus rule in habit number five. But imagine if you have two Social Security payments. ONE OF THEM IS $1,500.01 of THEM IS $2,500.

Wes Moss [00:06:38]:

That’s $4,000 a month plus then another $2,000 from this $500,000 you’ve saved in an investment account or a 401k over the years. Now you’re talking about $6,000 a month during retirement that you can also theoretically have grow with inflation if it’s invested properly. AnD WE’lL GeT to the investment part in a few minutes. But $600,000 isn’t a small monthly amount if. And this leads us to habit number two, if you don’t have a mortgage and your overall expenses are in check, and a huge part of doing so is not having that big monthly mortgage payment around the same time you stop working. So habit number two, mortgage paid off or payoff within sight again by the time you get to retirement. And here’s a statistic from my research, retirees who are within five years of mortgage payoff are four times more likely to be hreps, four times more likely to end up in the happy retiree camp. As years to pay off mortgage go down, happiness levels, they go up.

Wes Moss [00:07:50]:

So by the time we get to retirement, we want to either have our mortgages paid off or the mortgage payoff is within sight. And this is one of the most surprising data sets that I’ve uncovered over the years. And this is this mortgage data. I’ve asked over again 1500 families about this. Hey, if you have a mortgage, how many years do you have left to pay the mortgage off? Remember, most of the research we’re comparing what the happiest each rob’s fours and fives, the happiest two quintiles to the Urobs, or the least happy two quintiles. But in this, we look at it a slightly different way. We chart each happiness category, one through five. One’s the least happy group, five is the most happy group.

Wes Moss [00:08:31]:

And we look at how many years each group has, on average, left to pay off on their mortgage. And here’s what the data says. As years to pay off mortgage go down, happiness levels, they go up. Now, you can explain this in a lot of different ways because there’s this always been this great debate. Do you take out a mortgage, pay the interest, knowing that you have other money that you’re investing ultimately, and hopefully at a higher rate? There have been whole books written about why you should carry a big mortgage and invest the rest. And the financial argument can make a whole lot of sense in that. But what it doesn’t account for that our research does, is the psychological benefit reducing your overall anxiety by not having a mortgage payment. And we also know when we do that, we make overall smarter, better decisions when we have less anxiety around money.

Wes Moss [00:09:28]:

So what else explains this? As years to pay off mortgage goes down, happiness levels go up. One mortgage payments are the biggest, scariest payments we make. We stretch typically to take out a mortgage to begin with, and it represents the basic need of shelter and the roof over our head. We also consistently see what happens if we don’t pay a mortgage. How many movies have we seen where there’s furniture out on the lawn due to what missed mortgage payments? Hey, you’re out of here. Bank comes in and takes back the house. Another part of the equation here, I think it’s very unsatisfying to be making a mortgage payment month after month after month. It’s not as though this is money for travel or school or enjoyment or entertainment.

Wes Moss [00:10:13]:

It’s critically important, but it’s not really discretionary. It’s just, hey, it’s a must pay. So when the mortgage is gone, it’s a massive relief on so many levels. Hey, that roof above my head, it’s paid for. I’m safe in my house. And now I can spend that $2,500 a month, $3,500 a month, five grand a month, whatever the payment’s been over all these years, I can spend it on life, I can spend it on travel, I can spend it on fun, I can spend it on family. Again. As years to pay off mortgage go down, happiness levels, they go up.

Wes Moss [00:10:53]:

Now, how should you pay off the mortgage? Well, one of the easiest ways to shave time off your mortgage is to simply make an extra mortgage payment per year. So instead of twelve monthly payments, you end up making 13 monthly payments. If you get yourself on that schedule, a lot of times you don’t miss it. Doesn’t feel like it’s all that much more, but it can shave 25 or 30% off the overall life of that mortgage. I also like using the one third rule, which says if you can pay off the mortgage by using no more, no more than one third of your non retirement savings money, then you may want to write the check. So by non retirement, I mean any sort of money coming out of a brokerage account or a savings account, but not a 401K, not an IRA, not a retirement account. And that has everything to do with taxes. If you pull a big chunk to pay off a mortgage out of a retirement account, it could dramatically increase your overall tax bracket.

Wes Moss [00:11:53]:

And taxes on everything for you in that given year could go way up, making it not a good area to tap to pay off a mortgage. So for example, though, if you have $150,000 in non retirement savings, again outside of an IRA or four hundred and one K, and you only owe $40,000 on a mortgage, 40,000 is less than a third of the 150 you may want to consider paying off the mortgage in one final check. And I don’t know if I know any families that have done this that go back to regret it. So, so much of this can be the emotional health that we get from getting rid of this payment that so many of us pay for decades and decades in our lives. And I’ve learned from the happiest retirees that a real sense of peace and serenity comes with owning your home totally free and clear. HRBs love not having to write that check on a monthly basis. And once that obligation is gone, it lowers your overall monthly retirement expenses, and then it takes the pressure off of your nest egg and the other sources of your monthly income. Habit number three, multiple streams of income.

Wes Moss [00:13:06]:

Hrobs have three to four streams of income. These are different, unique streams of income. Hrobs have two or three. So it’s more income streams. These are unique income streams, not necessarily more income. More different income streams lead to higher levels of happiness in retirement. So imagine this. Imagine you’re going to receive $10,000 a month for the rest of retirement.

Wes Moss [00:13:31]:

Sounds great for life. Would you choose to receive one check in the mailbox for ten K every month? Or would you want to receive ten $1,000 checks in the mailbox every month. Think about that just for a second. Maybe for convenience, you’d want just the 110 thousand dollars check. But when you start to think about it, you really would want ten different $1,000 checks just in case something happened to that source of the ten K, for some reason, something happens to one income stream. Well, we still got nine left. Income diversification. So your retirement income will likely come from a bunch of different sources.

Wes Moss [00:14:17]:

And I think the more and different sources you have, the better you could have. Let’s say one rental property, and that pays for everything. Then what happens if that rental property goes away? Ideally, we’d love to have Social Security one, for you, Social Security for two, your spouse pension one, pension two, rental property number one, rental property two. Then investment income maybe comes from your IRA or your 401K. Then rent, then investment income from your brokerage account. So more income diversification is better from a psychological perspective. And it also gives you more control over to how to manage your income and your taxes for that income over the course of retirement. Again, let’s say you have one income source.

Wes Moss [00:15:03]:

It’s just going to be taxed as it’s taxed. If you have multiple income sources, you can choose to delay. You can choose to take the ones that either need to be taken at a certain period of time or should be taken, and then maybe delay other payments like IRA withdrawals, until you either need that money for spending or you’re forced to take that money. In the case of, let’s say, an RMD or required minimum distribution, you have to start taking at age 72. So while you’re planning for retirement, think about all the different income streams that you could potentially have when you get there. It might be receiving paychecks from part time work or hobby income, Social Security income from different rental properties, different forms of pension income or veteran benefits. And then, of course, multiple ways to generate income from different investment accounts, retirement accounts, IRAS, brokerage accounts. The S and P 500 fell nearly 20% in 2022.

Wes Moss [00:16:14]:

Inflation jumped to double digits, and the Fed has continued to relentlessly raise interest rates. It feels like chaos. But at Capital investment advisors, we take a disciplined approach to investing to help our clients find happiness in retirement. Regardless of the scary headlines, we can’t control the chaos, but we can control what we do about it. If you’d like help with your disciplined retirement strategy, reach out to our team@yourwealth.com. That’s your wealth habit number four. Hrobs are not just savers. They’re investors.

Wes Moss [00:16:56]:

In fact, I call hrobs tomorrow. Investors, meaning happy retirees, understand that investing takes time, and it’s all about participation. It’s not about perfection. Here we are in a tough 2022, where it’s been hard to find any corner of the market that’s done well, and it’s been for the better part of a year. And when difficult markets drag on and on and on, people start to lose confidence, just in general, in the investment process over time. On paper, you might know, oh, I’ve got to invest over three years and five years and ten years. But after a whole year of returns that aren’t so great, that can wear on you and you can start to forget what we’ve all been taught and what we should always remember, that investing takes time. Participation, not perfection, meaning that if we wait, wait until the perfect time to invest, we’re never really going to get a chance to invest.

Wes Moss [00:17:57]:

And that even bad market timing is much better than not investing in the first place. I think there’s a sense for a lot of investors that if you’re going to be successful as an investor, we need to nail the timing. We need to get it right. We only should be investing when markets pull back, where there’s this perfect entry point. And if we can’t do that, then maybe we should just leave money in cash or bonds or safety. But the numbers suggest otherwise, big time. And this goes back to a study that I just updated as of the third quarter of 2022, called participation versus perfection. So let’s look at these numbers.

Wes Moss [00:18:42]:

We’re going to look at what $10,000 grows to over different periods of time. We’re going to look at long term, intermediate and short term periods of time. So $10,000 in the S and P 500, what that looks like over a particular period of time. Again, all these numbers up to the end of Q three in 2022. But here’s where it gets interesting. Every period we’re going to talk about is relevant because that period of time, or the years we’re using, we’re on a precipice of a major stock market correction. So we’re going to compare the results of having perfect market timing, meaning we only invest that $10,000 when the correction is at its very low or its Nader or its trough. And we’re going to compare that to the very worst possible market timing, meaning that we put that $10,000 to work right before the market went into a big crash and then compare those two.

Wes Moss [00:19:37]:

So perfect timing versus the worst possible timing you could have versus simply holding money in, let’s say, government treasuries or government T bills, just to get a little bit of a yield and a lot of safety. Here’s how the numbers compare for multiple periods of time. We’ll look at 60 years, 20 years, ten years, and then a short term period, three years. So first, let’s start with a long, long run. So, 60 years. We’re talking about investing in the early 1960s. Now, this example, don’t roll your eyes. It may not be overly helpful, because we already know that if we’re really, really long term investors and we give markets time, it’s going to work out.

Wes Moss [00:20:18]:

If you’re looking at the broad indices, the broad S and P 500, and maybe we’re just reiterating the point that we already know long term investing works. So let’s look back at 1961. Let’s see what $10,000 invested at the absolute bottom of the 1960s bear market is worth. That’s perfect timing again today. What’s it worth today versus investing at the 1961 peak, which would have been the worst possible timing? All that compared to leaving that $10,000 in treasury bills to avoid all risk. So what do we get? Perfect timing. That $10,000 back in 1961 at the absolute perfect timing market bottom today is worth about 4.6 million. How about the worst timing? So buying right before the market took a major dive and fell almost 30%, that $10,000 is now worth 3.3 million.

Wes Moss [00:21:18]:

How about T bills? We’re talking 60 years here. T bills. That $10,000 is now worth 146,000. Again, perfect timing. 4.6 million. The worst possible timing if we were starting in 1961 until today. Still 3.3 million T bills. 146,000.

Wes Moss [00:21:39]:

So the worst possible stock market timing starting in 1961, is now worth 23 times what you would have had investing only in T bills. But, Wes, of course that one works because it’s a forever holding period. 60 years. What about some shorter time periods? Let’s try the long run. Not the long, long, long run that we just did, but investing in the 2000 to 2002 time frame, let’s call that about 20 years. $10,000 invested at the worst possible time, which would be March of 2000, right before the market headed into a major bear market. That bear market took stocks down 49%. Really bad timing versus investing at the perfect bottom, which didn’t happen until October of 2002.

Wes Moss [00:22:31]:

All right, perfect timing. Nailing the bottom $10,000. Then today, would be worth $72,000, which, of course, is a tremendous return. Seven times your money. But the worst possible timing, investing in that March of 2000 period of time only to get pummeled by 49% in the SP $510,000 then, is now worth almost 40,000. 38,000, to be more precise. Still, almost four times your money. What about leaving money in T bills and avoiding all of that up and down pain? Investing only in T bills? That $10,000, call it 22 years ago, is a little less than 14 grand today.

Wes Moss [00:23:19]:

So even the very worst, worst, worst stock market timing would have netted you almost two and a half times what T bills would have done, 38K versus 14. So even the worst possible stock market timing still wins by a long shot. Versus T bills or cash. How about the intermediate term? Let’s call it ten years or so. Let’s go back to 2011. That’s another year when we had a bear market again, another year with a near bear market decline. In this case, it wasn’t as bad as 2000, down about 20%. 19.4, to be exact.

Wes Moss [00:23:56]:

If we had perfect timing and we invested our $10,000 in 2011 at the very bottom of the trough, it’s worth today around 43,000. If we had the absolute worst timing and invested at the 2011 peak, $10,000 then would be worth today right around $35,000, still more than three times your investment. How about sticking money in T bills back in 2011? What would that be worth today? About eleven grand. So barely any return at all. So even the worst possible timing from 2011, if you’ve held it up until today, it’s netted you more than three times what holding cash, or T bills, would have done. What about the short run? Or relatively short run? We’ll go back to the year of 2020, the pandemic crash, which has been about three years now. Imagine you were about to invest $10,000 right before the pandemic hit, but you waited until the market bottomed, and then you nailed the March 2020 bottom of the stock market, and you had perfect timing. Your $10,000 today would be worth about 17,500.

Wes Moss [00:25:07]:

If you invested right at the peak, before the pandemic crash in February of 2020, your $10,000 then invested in the SP 500 today would still be worth about $11,500. So you still have made about 15%. What about T bills? Well, because interest rates are so low, or were so low, they’ve changed a bunch here in 2022. $10,000 in T bills two and a half, three years ago would have only made a few hundred bucks, barely north of ten K today. So even the worst possible market timing still beat T bills by over 10%. And that’s going back less than three years. So the bottom line here is that ATrobs get this. They’re investors.

Wes Moss [00:25:54]:

They’re not just savers. And they think about tomorrow. And how do they think about tomorrow? They think tomorrow is either A, great, B, good, or C, which is the answer? All the above. Again, atrobs. I would call rational optimists about the growth of the future here in the United States and how that gets represented by owning shares in companies right here in the US. Habit number five, spending with a 4% plus rule. This one has to do with budgeting in a way that you’re not worried about running out of money and you’re confident that you can keep up with inflation. So all at the same time, very simply, AHS understand the 4% plus rule, and then they spend what that produces on anything they want.

Wes Moss [00:26:42]:

Go back to 1994. William Bangin, he’s an MIT Aeronautics guy turned certified financial planner. He calculated stock and bond returns in retirement scenarios for the previous 75 years and looked at every single rolling period during that period of time, from month to month to month, and found that retirees who drew down 4% of their portfolio in their first year retirement, then adjusted that nominal number for inflation every single year to whatever inflation was in the US economy. They would likely see their money outlive them again, not run down to zero in their 80s or 90s. By the way, he assumed that portfolios would have at least 50, but no more than 75% allocation to stocks. So based on Bengan’s calculations, 80% of the time, 80% of the time, nest eggs lasted 50 years, or 50 years plus. In the worst case scenario that he found money lasted how long? 35 years. Pretty quickly after he published this back in the early ninety s, the four percent rule was born, and it really kind of became a roadmap for people trying to figure out a way to, hey, how do I maximize my spending without running out of money? Of course, if you only take 1% out a year, you’ve never run out of money or would take, let’s call it 100 years.

Wes Moss [00:28:15]:

So we’re trying to figure out, how much can I spend, what’s the most I can spend, and still have a very high probability that my money will last for decades and decades, keep up with inflation, and not run out again. The 4% rule was born. Now, the retire sooner team. We’ve updated this rule a couple of different times. We did it in 2014, then we did it in 2021 using all the market data that hadn’t been incorporated, because Bengan did this way back in the 1990s, the early 1990s, and again updating this through 2021 at 4%. It turned out that about 83% of the time, money still lasted 45 years, and about 93% of the time using the 4% rule. Remember, 4% original retirement balance plus inflation every year, 93% of the time money lasted at least 40 years. Once you start looking at, let’s call it more realistic lengths of time for retirement, 30, 35 years, you’re getting very close to, let’s call it a 99% chance, because we don’t ever give anything 100% chance in investments or financial planning.

Wes Moss [00:29:31]:

But we’re getting very close to 100% chance that retirement savings should last as long as you do. Now, as a bonus, very recently, Bengan came out with another version of this and upped it to four and a half percent. Let’s call that the four and a half percent rule. From four to four and a half. That’s a twelve and a half percent raise of how much money you’re taking out of your retirement savings. He did this by also adding small companies or small cap stocks to the equation, and the numbers turned out to last a very similar amount of time, 30 plus years in the vast majority of cases. And from what I’ve seen during the 20 plus years I’ve been helping people plan for retirement, the key to all of this is not some set exact rule every single year. The key is to understand and use one of these rules as a rule of thumb or a guide, and then use that as a dynamic approach to maximizing what you can safely pull out of your nest egg.

Wes Moss [00:30:36]:

So comes down to anywhere between 4% and 5%. 5%. Certainly on the high end, 4% is a much safer number, but I think it’s sustainable as long as we’re willing to make adjustments along the way. There’s always this dance, this three step dance between the math, which is called objective, then the common sense, which is subjective, and then your emotions, which are very subjective, like greed and feaR. But I think the takeaway of understanding and using the 4% rule like happy retirees do, is that these are not static amounts that happen every single year. Sometimes you withdraw a little more. Maybe it’s been a great market year, you’re ahead of schedule, and there’s new and more things you want to do. I just had an email today, Wes, I’m thinking about taking a European Viking river cruise.

Wes Moss [00:31:28]:

Can I afford it? It’s 26 grand. Well, the answer is going to be different for everybody, but in this particular case, we’re still using the 4% rule. We’re still within that budget. I said, well, absolutely. But sometimes the answer is we’ve already gone beyond four and a half, even 5% in a given year. This is a rough year for markets. Can you take a trip to Hawaii? That’s $15,000. Maybe this is not the year to do it.

Wes Moss [00:32:00]:

So when we’re thinking about tapping our retirement savings, the takeaway for the 4% plus rule is that withdrawals aren’t meant to be perfectly static. Sometimes we withdraw a little more. Sometimes we have to tighten our belts, always knowing that we can be flexible around our spending as long as we follow this very important financial planning and budgeting rule of thumb. Of course, there’s no perfect formula to be a happy retiree. Think of it just as a long list of things that we can all learn from happy retirees that are already doing it. If we can emulate their habits, we got a really good chance of ending up in the happy retiree camp. And from a financial perspective, this lays the foundation for all the things that you want to do. Your core pursuits, your time with family, your socialization, and all the other things that we want to do that make up a happy retirement.

Wes Moss [00:32:58]:

And from a financial perspective, if we can get to that, at least that $500,000 median checkpoint, we have mortgage payoff within sight. We have multiple streams of income lower our overall anxiety, levels of money not running out. We remember the rules of being a tomorrow investor. Participation, not perfection. And we get a really good grasp with a 4% plus rule. Put that all together and we’ve got the money side of being a happy retiree down pat. It’s one of my favorite conversations to sit down with a family and walk through. How are we doing on steps one through five? We’re good on one, we’re good on three, we’re good on four.

Wes Moss [00:33:42]:

But two and five need a little bit of work. And it’s a work in progress, but it’s work that you’ll be happy you put in.

Mallory Boggs [00:33:50]:

Hey y’all. This is Mallory with the retire Sooner team. Please be sure to rate and subscribe to this podcast and share it with a friend. If you have any questions, you can find us@wesmoss.com that’s wesmoss.com. You can also follow us on Instagram and YouTube. You’ll find us under the Handle Retire Sooner podcast. And now for our show’s disclosure. This information is provided to you as a resource for informational purposes only and is not to be viewed as investment advice or recommendations.

Mallory Boggs [00:34:18]:

Investing involves risk, including the possible loss of principal. There is no guaranteed offer 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.

Mallory Boggs [00:35:02]:

Investment decisions should not be based solely on information contained here. 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 or financial planning considerations or decisions. The information contained here is strictly an opinion and it is not known whether strategies will be successful. The views and opinions expressed are for educational purposes only as of the date of production and may change without notice at any time. Based on numerous factors such as market and other conditions.