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THERE ARE ALL KINDS of financial talents that seem desirable. Who wouldn’t want a knack for finding undervalued stocks, identifying star fund managers, and figuring out which way the stock and bond markets are headed? The problem: While some folks may briefly appear to possess these talents, it usually turns out that their apparent prescience was nothing more than dumb luck.
Where does that leave us? Forget the obvious but elusive financial superpowers, and focus on those that—with a little work—are available to all of us. Here are seven advantages that I think we should all strive to cultivate.
1. Greater humility. The larger financial world, as well as our own financial life, are rife with uncertainty. Think about all the unknowns: market meltdowns, job losses, ill-health, home repairs, family tragedies. The list goes on and on.
There’s a reason this site is called HumbleDollar. We should humbly accept that there’s much about the financial world that’s unknowable and that we can’t control. Instead, we should focus our energies on those aspects of our financial life where we do indeed call the shots—things like how much we save and spend, what insurance we carry, how much we pay in investment costs, our portfolio’s tax bill and how much investment risk we take. No, none of these is as exciting as hunting for the next hot stock. But they’re much surer routes to improving our financial standing.
2. Lower fixed costs. Our goal shouldn’t be to spend as little as possible. Rather, we should seek to spend on things we truly care about, while still setting aside enough for the future. But if we’re to meet those twin goals, something else has to give. My suggestion: Keep a close eye on your fixed living costs. We’re talking about things like mortgage or rent, car costs, utilities, insurance premiums, and recurring monthly payments for everything from gym memberships to cable TV to music streaming.
The lower your fixed living costs, the easier the rest of your financial life will be. You’ll have more for discretionary “fun” spending, for savings, and for giving both to charity and to loved ones. In addition, if your fixed monthly costs are low, you’ll be in better shape if your financial life takes a big hit, such as losing your job or needing to pay for a major home repair.
3. Less expensive wants. Where will you direct your discretionary dollars? There are all kinds of possible uses for our spare time and money: shopping for clothes, buying art, hobbies, vacations, concerts, eating out, upgrading the car, sporting events, remodeling the house.
What we choose will reflect our personal preferences and, as such, there are no bad choices, provided we can afford the purchases in question. Still, if we favor using our spare time in less expensive ways—picnics, gardening, exercising, reading books from the library, writing in our journal, hanging out with friends—we’ll find it easier to save and we’ll need a far smaller nest egg for a happy retirement.
4. Longer time horizon. Why do professional money managers and Wall Street analysts focus so much on the months ahead? This isn’t a tough one to answer: Short-term performance is a big driver of Wall Street compensation, including those year-end bonuses so beloved in the financial business.
This is where everyday investors have a huge advantage. They can look beyond today’s financial worries and focus on the long term, reaping the rewards that accrue to those who hang tough with diversified, stock-heavy portfolios through thick and thin. But how long is the long term? While the answer will differ for all of us, I think many folks will discover that a huge chunk of their savings won’t be spent for many, many years.
I usually suggest retirees keep five years of portfolio withdrawals in conservative investments, which should be enough to ride out a stock market decline and reap the benefits of the subsequent rebound. But let’s be conservative and make that seven years. Using a 4% withdrawal rate, seven years of portfolio withdrawals—ignoring bond interest and stock dividends, but also ignoring inflation—would mean keeping 28% of a portfolio in conservative investments, freeing up the other 72% to potentially be invested in stocks. That would be considered an aggressive asset allocation for a retiree, and yet I’d argue it’s still prudent.
What if you’re pretty sure you won’t need a big chunk of your portfolio to pay for your own retirement, and hence you’re spending less than 4% each year? The remaining money is presumably earmarked for bequests to family and to charity—and I, for one, would allocate 100% of that money to stocks.
5. Higher risk tolerance. Even if it makes sense to allocate more of your portfolio to stocks, are you comfortable doing so? Again, like other attributes mentioned here, I think a higher risk tolerance is something we can cultivate. By studying market history, and by recalling the market turmoil we’ve personally witnessed and all the fears that were never realized, we may come to develop a higher tolerance for risk.
To be sure, as some have argued, we shouldn’t necessarily act on this higher risk tolerance, even if our financial situation allows it. At issue is the all-important notion of enough. As Bill Bernstein has said, “When you’ve won the game, stop playing with the money you really need.”
I think there’s a good argument for easing off the risk pedal once we’re retired and being a tad more cautious—perhaps, as mentioned above, setting aside seven years of portfolio withdrawals in short-term bonds, rather than five. But I’m not willing to take this notion of “having won the game” to its logical conclusion by, say, banking everything on income annuities and inflation-indexed Treasury bonds, so every spending dollar needed in retirement is guaranteed to be there.
6. Greater self-awareness. The more we understand ourselves, the better the financial decisions we’ll make. This isn’t just about knowing our risk tolerance. It’s also about grasping our greatest hopes and fears, thinking about how our upbringing continues to influence us, understanding what money means to us, and pondering how we can best use money to boost our happiness.
This self-exploration never ends—because our attitudes change with experience and with age. For instance, those who are younger often show more interest in acquiring possessions. Partly, it’s because their time horizon is longer and thus they have more time to enjoy whatever items they buy. But it’s also because these folks haven’t yet suffered the countless cycles of thrill and disappointment that accompany the many possessions we purchase. Instead, that wisdom has to be learned—and it helps explain why those who are older have a greater interest in buying experiences rather than possessions.
7. More concern for tomorrow. Our lives are a constant tradeoff between our current self’s whiny demands and the often-ignored needs of our future self. Spend today or save for tomorrow? That’s the classic financial tradeoff.
But there are also tradeoffs in other areas of our life. Shall we have the cheeseburger and fries today, knowing the scale won’t be so kind in the morning? Shall we let work slide this week, knowing next week could be a nightmare? Shall we skip exercising today, knowing tomorrow’s health won’t be quite as good?
I realize that, if we crave a greater sense of control over our life, sacrificing today for a better tomorrow can become a way of life—and a rather dull one, at that. Still, despite that risk, I’d argue that an awareness of tomorrow’s needs is a financial superpower and, indeed, it may be the most important one.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.
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3. Less expensive wants is useful, but I’d like to extend it. Learn to distinguish between your wants and what the people around you assume you’ll want. A trip and a camera were the catalysts that made me realize how often I spent money on things I didn’t actually want.
In my mid-30s, I had saved up for a 15-day vacation in London, my first trip across the Atlantic. I had planned for over a year, reading guidebooks and making lists. The day before I left, my family gave me a camera, because everyone wants to take photos on vacation. I used the starter roll of film my first day and started to buy more. Then I realized that I didn’t want to lug a camera around. I wanted to enjoy my vacation, not immortalize it. Why spend money doing something because everyone wants to do it?
I’ve asked myself that question frequently over the years. I’m extravagant about play tickets, but I haven’t gotten around to buying a big flat screen TV or subscribing to streaming video. It took me almost forty years to learn to distinguish my wants from other’s assumptions about what I’d want, but it’s been a good way to save money.
2. Lower fixed costs
I have purchased a lot of things that I thought I would enjoy but didn’t. They were “nuisance” purchases that I could pay for in full, tuck away and forget about. Our house is not an avoidable expense.
I wonder how many people have stretched to buy a house and when the bills come due they realize how much they had to give up long term to own it.
As Henry David Thoreau said, “Our houses are such unwieldy property that we are often imprisoned rather than housed by them.”
That’s a great Thoreau quote.
See comment below
I am wondering about “Enough”. In regards to item five, I wonder how many years worth of future withdrawals most retirees actually keep in cash and short term treasuries/TIPS. Experts far more knowledgable than I have suggested as few as 3 or as many as 25. This of course excludes the small minority who need a small percentage, less than 2% per year, because they are wealthy and or who have other sources of income in retirement.
We are 70, have been retired for 5 years, and use a modified version of the “4% rule” having started with 3%. We generally keep enough cash and short term government bonds to provide 10-12 years of future withdrawals with the balance in equities. I chose to compromise between Bernstein and Jonathan. My stock/bond allocation varies approximately between 70/30 and 65/35.
I wonder how many years worth other Humble Dollar readers prefer?
Thanks for yet another clearly written and thought provoking article Jonathan!
I follow Christine Benz of Morningstar recommendation of 10 years. The idea being unless a fairly rare downturn in the markets occurs you are safe. IMHO if the downturn were to get up towards 7-8 years I would probably start paring back my discretionary spending to hopefully extend the last 2-3 years of bonds one more year.
Another great article, Jonathan. All of those points are stellar recommendations. I still have to kick myself occasionally to remember how lucky/fortunate I am – I guess that’s #1, the humility part.
For those fortunate enough to have saved diligently for the retirement portfolio needed to live on, a Roth IRA comprised of Vanguard Total World Stock Index is appealing. It costs only 10 basis points annually to invest in equities for the next 30-40 years. At 52, we plan to bequeath these Roth IRAs to our children. Committing to VTWAX eliminates poor investor behavior choices. My only job is to fully fund each January then, do nothing.
That’s exactly what I do:
https://humbledollar.com/2022/02/paying-it-forward/
Owning Vanguard Total World Stock in a Roth earmarked for my two kids has been mentally freeing: It’s a significant chunk of my wealth — and yet I almost never think about it.
I think a lot about how strategy should differ for retirees w/no pension or bequeathment desires who want to ensure “enough” until they pass.
The advice I see is to buy immediate annuities. But how much can you really lock up in annuities? States cap protection, so you’d need several, at least.
I stick w/Bernstein. Steep losses + no human capital = too much risk for me. Some equities? Sure. But can’t see the upside of over 40-50% if one can stick to 3-4% withdrawals on what they have.
Is that extra growth/inflation protection truly worth big losses at the worst time? Return of principal is more important to me than return on principal.
The last 2-3 recessions were short. Most retirees with 5-7 yrs safe funds will panic big time if our next drop (and/or flat recovery) lasts 10-15 yrs. That’s not really a black swan scenario.
Longer time horizon: many incorrectly assume their time horizons are very short. If your time horizon is short, do not invest. Investing is for long time horizons and meant for more aggressive allocations. Often when a person turns 65, they feel their time horizons are short, even though it has been shown that retirement can be anywhere from 10-30 years. Set aside spending capital in money market and treasury ladders while having equity portfolio allocated based on tolerance. Great article Mr Clements. Keep them coming.
check out the latest podcast featuring Jonathan Clements here: https://youtu.be/DfdJdpLwOsc
Jonathan, another impactful article for me. Having just celebrated a 48th birthday, I look forward to reading Humble Dollar daily and suspect that upon retirement (not sure exactly when) I will be indebted to the many contributors of Humble Dollar and yourself for perspective and sound advice. Many thanks..
If one retired in 2000 with a very heavy equity portfolio and a SWR of 4%, after 20 years they would be in a very bad position economically. Check it out for yourself
thats Incorrect. Let’s say I had 1M invested in 2000. I withdrew 4% annually, as of July 2023, roughly have 1.2M. I’ll confirm via excel when I have time. This was Ai so grain of salt of course.
if one had had 10 years of spending money in say TIPS, iBonds or something like that would have carried them through 2010 when the market rebounded to about a decade long bull market. That means, not having to touch the equity share of the portfolio for 10 years should have bridged them into a rebound, or?
True, but what about Jonathan’s recommended 7 years of non-equity spending money?
“Our lives are a constant tradeoff between our current self’s whiny demands and the often-ignored needs of our future self. ” I really like your word choices in this sentance, Jonathan.
Bernstein fan here. “But I’m not willing to take this notion of “having won the game” to its logical conclusion by, say, banking everything on income annuities and inflation-indexed Treasury bonds, so every spending dollar needed in retirement is guaranteed to be there.” We assure every spending dollar in retirement can be guaranteed to be there (OK, except emergencies/shocks..) with a combination of a 10-year TIPs bond ladder, delayed SS and small pensions-with a 50/50 portfolio (so not banking everything on guaranteed..). Like Bernstein. Sleep fine at night protected against downside, longevity and inflation risk and still have 50% stocks for long term growth. I’m not willing to risk a 2007-2009 event with a 57% loss in retirement based on “safe” withdrawal rate strategy.
I read a few retirement forums and don’t understand why the default bond position for many seems to be a total market bond fund. These have long average maturity and are higher risk than many investors appreciate. I prefer shorter duration funds and bonds. Sure I get a little less interest but since I have better actual diversification I am comfortable with a higher equity allocation.
I agree. My preference is to overweight stocks and play it safe with bonds, favoring short-term government funds.
Totally agree. It’s hard to beat a 5.4% yield in my T-Bills, and 9% I-bonds last year (I wish I could by more than the $10k limit per person/year).
People buy long term bonds for the same reason they get a fixed rate mortgage. Sometimes it is good to lock in rates for a long period. If / when short term rates fall the long term bond holder will continue to collect high coupons and / or reap capital gains.
Thanks for your article Jonathan, it helped validate my approach with protecting our living expenses. One question, do you factor in dividends and interest in the withdrawal percentage each year? Thanks so much for creating HD it is a interesting forum and provides excellent education for our retirement years.
If the 4% rule says you can withdraw, say, $40,000, and you receive $10,000 in cash during the year from dividends and interest, you should only be selling another $30,000 in investments.
Thank you
I am not sure retirees would be that comfortable with almost 3/4 of their assets in stocks in retirement. Quoting someone I forgot, “The goal in retirement is not to optimize returns, but not to outlive your money.”. If someone like myself, 73, and living off my investments + SS, losing half of 3/4 of my investment portfolio would be quite upsetting. There have been periods like 1966-82 where the stock market was stagnant. Bernstein on the other hand says 25x of your fixed expenses in safe money. He also says “When you win the game, cash in your chips.” Bottom Line, to each his own. WE cannot say unequivocally the future will replicate the past. The distribution phase is a completely different animal, and we all have different risk tolerances. I would suggest reading Nick Murray’s book Simple Wealth, Inevitable Wealth, one great book
See also above, if you don’t have to touch your 3/4 portion of your portfolio when you lost the half in a bear market but lived of off 10 years inflation protected government bonds for example (TIPS, TIPS ladders, iBonds) you would look at a huge paper loss but not really be at risk until the market came back around. The point is not so much to have 3/4 in equities but to have the excess of 10 years spending money in equities. For some that could mean only 20% in equities, or 80%, depending on the size of the portfolio and annual cash requirements. So the 75% is not an absolute equity allocation but one example.
Unless I am missing something in your comment maybe.
If I were in your position and not living off a pension, I would feel the same way. But given the variables and future unknowns, lack of a guarantee if you will, I would think more people would embrace an immediate annuity at retirement to assure a guaranteed income stream using a portion accumulated assets and thus minimizing risk.
I am still unclear on the reliability of annuities. It seems to be a non-governmental company offering and that company could easily get wiped out and go bankrupt through bad management or market conditions. As we have seen in the past, ratings agencies are not to be trusted so it seems like the only game in town is the federal government who can print money if needed. Thanks for your input!
dl777
Only life insurance companies (all of which are regulated by the state in which they are domiciled) can offer annuity contracts. While not perfect, checking out the life insurance company’s score from various Rating Companies, e.g. A.M. Best, Moody’s, Fitch, and Standard and Poor’s. I like to see how Weiss rates life insurance companies too: https://weissratings.com/en/insurance.
So, go with high rated life insurance companies and then know that every state has a “Guaranty Association” to address what happens if a life insurance company that issued annuity contracts (except variable annuity contracts) “gets wiped out and go bankrupt through bad management or market conditions.
See the following link for information about state guaranty associations:
https://www.immediateannuities.com/state-guaranty-associations/
For retirees, SPIAs (single premium immediate annuities) can be appropriate — pay a life insurance company $100,000 premium in in return that company promises to pay you (and if you name another person) an income for as long as you live.
If you want to get a rough idea what sort of “guaranteed monthly income” $100,000 in premium will buy, you can use the “quote” feature at Immediate Annuities (https://www.immediateannuities.com/)
or their Annuity Shopper’s Guide:
(https://www.immediateannuities.com/pdfs/as/annuity-shopper-current-issue.pdf?arx=d)
For what it’s wroth, given state guaranty associations, I’d never purchase a SPIA for a premium in excess of the guaranty association maximum (usually $300,000).
Two other sources about annuities for your consideration ate:
Given fewer and fewer retirees will have an employer provided pension for a monthly income they can’t outlive, allocating a portion of their accumulated retirement assets into a SPIA premium so they have their own personal pension is worthwhile consideration.
Hope this help…
Thanks for posting such a comprehensive response!
Not sure about “easily.” Some measure of risk, but going with a good insurer minimizes that risk. Also, most states provide a backup guarantee in that event. Frankly, assuming a long stable insurer I don’t see any more risk than an employer funded (or underfunded) pension plan or the stock market for an individual.
I am not an expert on annuities, but it seems to me immediate annuities as a partial retirement income stream have their value.
My former employer just offloaded the pensions of 2000 retirees by buying annuities and transferring $1 billion to the Prudential who now has the liability. There was extensive due diligence and fiduciary analysis before that happened.
This is a great list. We all need more humility and to accept that a lot of what happens in life is not in our control. But, we should not let that fact lead to resignation or even despair. I’ve found that “the harder I work, the luckier I get.” For me part of working harder has been spending the time and effort to educate myself throughout my life in a variety of areas including investing. My thanks to HD for being part of my education.
What’s in your control: asset location and allocation as well as saving vs spending. What’s in “some” of your control, employment earnings and duration and longevity. What’s out if your control, market returns and tax policy as well as savings and benefits. Just important to understand there are some controls regarding retirement.
I love these core HumbleDollar thoughts. I didn’t develop a financial number seven until around age 30, at least 10 years later than I should have. It has been major driver of my thoughts and actions since. I’m very thankful to have found this website, where knowledge of these deceptively simple “superpowers” is available to all.