On today’s episode, we ponder the question, “Can money buy happiness?” The answer might surprise listeners, and Wes borrows the words of best-selling author Morgan Housel to help discuss the positive and negative psychological effects money can have on retirees. Wes then uses his own “Bucket System” analogy to explain income investing and how three keys can help folks sleep well at night.
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- Wes Moss [00:00:00]:
You. I’m Wes Moss. The prevailing thought in America is that you’ll never have enough money, and it’s almost impossible to retire early. Actually, I think the opposite is true. For more than 20 years, I’ve been researching, studying, and advising american families, including those who started late, on how to retire sooner and happiest. So my mission with retire soon, your podcast is to help a million people retire earlier while enjoying the adventure along the way. I’d love for you to be one of them. Let’s get started.Wes Moss [00:00:35]:
I’m going to start out with a quote from the famed Morgan Howzel. This is a guy who wrote the psychology of money. We need to get him on the show. I think we tried to get him on the show. He’s a pretty busy guy. Eventually, hopefully, we’ll get him here on the retire sooner podcast. But wonderful writer, and not only is he a great writer, but his insights are so important. And he talks about something that is referred to as BFI, which is a term that I have seen for really the last couple of years, and have always thought that it had something to do with cryptocurrency.Wes Moss [00:01:14]:
For some reason. I have never even known what BFI was until this week. I’ve always called it behavioral finance and didn’t realize that half of our industry, now you’ve got to be under the age of probably 22 to call it BFI. But our industry has been talking about behavioral finance for decades. It continues to gain attention because humans are understanding, investors are understanding how important it is to their long term outcome. Because whether we like it or not, emotions make up 50% of our investment decisions, maybe 80% of our investment decisions. If we were robots and we invested with artificial intelligence only, and we only looked at the numbers and we added to the stock market every time it went down, and we knew history would eventually make markets go up, and we never got over concentrated in one area, and we didn’t buy and chase stocks that were trading at 50 times because they were a fad, then we’d probably end up as wonderful investments over time. But guess what? Robots don’t make money.Wes Moss [00:02:16]:
At least they don’t do today. Humans make money, and it takes blood, sweat, and tears to do that. And then with great discipline, we have to have the discipline. Jeff Lloyd, by the way, joining me on the retire Sooner podcast. Please give me a synonym here for discipline. To then invest that money and watch it. Yo, yo, up and down. Can you think of a better word?Jeff Lloyd [00:02:38]:
You have to have the wherewithal. Okay, there you go. Wherewithal that’s what I was going to say.Wes Moss [00:02:45]:
The self sacrifice, to be able to take money out of your paycheck and put it away and not touch it for a long time and watch the value go up and down. By the way, you’ve been here on the retire sooner podcast before. I didn’t properly introduce you here on this episode. Jeff Lloyd, producer for many years now here on the show, now here in the studio. Thank you for being here.Jeff Lloyd [00:03:07]:
Thank you for having me back.Wes Moss [00:03:09]:
So Morgan Hausel comes out swinging and says this. I think what many people really want from money is the ability to stop thinking about money, to have enough money that they can stop thinking about it and focus on other stuff. It’s a weird relationship. Yeah, Morgan, you’re right. They become obsessed with making money, with the hopes that someday they can ignore it altogether. That obsession is fueled by stress and anxiety and often shows up in career ambition, and it shows up in aggressive investing and type A motivation. And then once they become rich, they realize they can’t let go of the stress and it becomes ingrained in their identity. And ultimately they end up holding on so tight, it’s hard to even spend the money to begin with.Wes Moss [00:04:02]:
Now, that last part was not a Morgan housel quote. That was just me. But I love this. We think so much about money. We obsess over money just so we can never have to think about it again. I wish I’d come up with that. But Morgan Housel, he’s just so good and he’s so right about it. So we live in a world where again, we’re all after economic freedom.Wes Moss [00:04:26]:
That’s what the retire sooner. That’s what this podcast is all about. It’s about getting to economic freedom and not having to worry about money. Even though right now you’re listening to the podcast and you are worried about money, or else you wouldn’t be listening to the retire sooner podcast. Maybe you would.Jeff Lloyd [00:04:43]:
Or maybe they’re interested in money and they’re interested in retiring sooner and better. And yeah, put it all together, becoming a better investor.Wes Moss [00:04:52]:
In short, monetary security allows happy retirees to sleep well at night. And we live in turbulent times and that makes markets turbulent and the economy is turbulent and politics are turbulent. And it’s always rocking the boat back and forth. And it’s not uncommon that we end up seasick. And when we get seasick, we end up making mistakes and we end up saying, I’m not going to follow my plan. I’m not going to invest like that. Artificial intelligence is telling me, and I’m not going to listen to what history is saying. I’m going to do what I’m thinking in my gut because my behavior is driving my investing now and not my logic.Wes Moss [00:05:35]:
And that’s normal and fine because we’re human. And thank God, we’re still human, and we’re not just run by a myriad of funky named artificial intelligence. Google is what’s Twitter is.Jeff Lloyd [00:05:48]:
Which one’s gronk?Wes Moss [00:05:50]:
Is it gronk or gunk? Twitter’s has a name for their artificial. So there’s Chachi, BT, which is the most benign name. Then you had Bard, which was Google, that just changed to Gemini. Gemini. And then you have X, which is named Grok, I believe Grok. And then you have Claude, and then you have PI get a bunch of seemingly names to make these seems, these things seem normal, human, and friendly, but we’re not that. And by the way, would artificial intelligence be able to take over our investments? Of course it could. Of course it could.Wes Moss [00:06:31]:
And it could probably do an amazing job. But guess who controls the artificial intelligence? You. Me, people, humans. And we had an age of robo advisors that were set up essentially with artificial intelligence to buy and sell at this formulaic time and follow history. And guess what? It didn’t work because investors still have the keys to their own account. And when it wasn’t working, human behavior, BFI comes into play. And, eh, I don’t think so. So that’s the world we live in.Wes Moss [00:07:04]:
But we’re all here on the retire sooner podcast to get to a point of economic freedom as soon as we can, so we can do all the five money secrets of the happy retirees. I’m going to put myself on the spot here. We know the five money secrets of the happiest retirees. We’ve just recently done that on a podcast, the five lifestyles of the happiest retirees, which maybe that’s why even people with plenty of economic freedom, Jeff Lloyd, are still tuning in. So I’m going to put myself on the spot here. What are there are five most important lifestyle secrets of the happiest retirees. One, 3.6 core pursuits. Those are hobbies on steroids.Wes Moss [00:07:42]:
It could be duck hunting, could be fishing, could be woodworking, cruising, grilling, golf, tennis, pickleballing, you name it. Two, family habits. Essentially, we want to live near at least 50% of our adult children and not overfund the spending of our adult children. Three, love life. Marriage has a high correlation to happiness and retirement. You don’t have to be married to be a happy retiree. But if you are, you’re four and a half times more likely to end up in the happy camp. Four social, three to four close connections.Wes Moss [00:08:21]:
Those are not hobbies on steroids or friends on steroids. Those are people that you can call on a bad day or a great day. Those are close long term connections. And then five is faith. Happy retirees, they go to church. Part of that, I think, is just being part of an organized social group. So it goes back to the prior, but going to church once a week increases retiree happiness levels, or one and a half times more likely to end up a happy retiree. Maybe that’s why people are tuning in, if they already have plenty of money to retire.Wes Moss [00:08:54]:
Here we are talking about the three ways to sleep well at night when it comes to your retire sooner journey. So the three keys to help us sleep well at night when it comes to this process and this journey, they start and they revolve around what I would call the investment bucket system. It’s a way to think about diversification and asset allocation and cash flow all at the same time. So we have this fundamental foundation set up. We know that we’re all after total return. Total return is a pretty simple formula. It’s growth or appreciation plus income. Now growth, that part of the equation can be positive or negative at any given day, week, year.Wes Moss [00:09:35]:
Income is almost always additive. You can’t really have a negative dividend. Maybe. Jeff Lloyd there’s a way for some derivative to take away cash flow. But in the end, if you get paid a dividend or you get paid interest or you get paid a distribution, it’s cash flow. So it would be, if I can remember from math class, it would have the bars around. It would be absolute. It would always be positive.Wes Moss [00:09:58]:
So we start with the cash bucket. Jeff Lloyd this is just the super safe bucket. We think we should be able to get 5% in this bucket right now. But as we know, some of the big banks, yeah, the big banks are.Jeff Lloyd [00:10:10]:
Still paying zero to half a percent for money markets sitting in cash. And you can get upwards of three to percent, four even. I’ve seen cds and money markets pay anywhere from five to 6% recently.Wes Moss [00:10:25]:
But you have to be proactive about it. And I think that the big banks, their philosophy is if it’s cash, we’re going to leave it, not pay really almost any interest in it. And if you want to take it and put it in a money market fund or a CD, then you’re fine to do that, but this is your safety money. So your first bucket is the cash bucket. It’s designed to be your emergency fund. That’s part of the money that helps you sleep all night. So yields could still be close to zero, but if you’re proactive about it, those yields should be between three and 5%, at least in today’s world. Bucket number two, it’s the income bucket.Wes Moss [00:11:00]:
Now, quick caveat. All of these buckets should be able to pay some level of income, but this one is focused in on securities that are really designed just for income, and that’s bonds. Fixed income. Yeah.Jeff Lloyd [00:11:14]:
Think us government bonds, corporate boggs, high yield bonds. Now, high yield may sound risky, but that just means that they’re paying a little bit more out in income and yielding a little bit more.Wes Moss [00:11:27]:
And to your point, you go from a treasury that can be three to 5% historically, all the way up to a high yield bond that can be six to 8% historically. So that’s the range. That’s the range of cash flow you can get from that particular bucket. That is a variety of bonds, and that is the category of interest.Jeff Lloyd [00:11:48]:
Yeah, and it’s a variety of interest in bonds. But also you can look at it through like a duration standpoint of you’re getting x percent of yield for five years or x percent of yield for 20 to 30 years.Wes Moss [00:12:02]:
So you’re also thinking duration, short term, intermediate term, long term, when it comes to bonds, and they pay out interest. And if it’s not in a retirement account, just a regular after tax account, remember, interest is taxed at ordinary income, so that’s something to think about. Then you have the next bucket, the growth bucket. In my opinion, this is the real workhorse bucket. It’s the real engine of all the buckets with yields or income that can be relatively low. The S and P 500 only pays out around one and a half percent, not even quite that much in dividends. But then you can start thinking about adding in some of the sectors that do pay two, three, 4%. Think utilities, healthcare, energy sector, consumer staples, and you end up with this diversification.Wes Moss [00:12:53]:
Many different stock categories. Some pay a little bit of income, some pay a lot of income, but in this bucket, the cash flow comes in the form of dividends. And if we’re outside of a retirement account, the good news about dividends is they have a much more favorable tax category. For the most part, we’re able to keep more of our dividend income relative to interest income, which tax debt. Ordinary income rates, dividends have their own special category called dividend tax rates. So think of the growth bucket there for the appreciation of those stocks over time and the dividends that we’re getting from a variety of stocks within that bucket. Next up, the alternative income bucket. Jeff Lloyd, give me some examples of what’s in that.Jeff Lloyd [00:13:39]:
These are your energy pipeline companies, your master limited partnerships, real estate investment trust, or reits, as they’re commonly referred to. You got preferred stocks closed in funds.Wes Moss [00:13:51]:
So anything that’s not, let’s say, purely a stock or a bond, this is why we have this middle bucket. That is some of the categories in between. And we can find reits today or real estate investment trusts that are in the two and 3% annual yield range. So not overly exciting all the way up to seven, eight, 9% for some of the pipeline companies. So it’s a really big range in this alternative income bucket. So that’s it. We have income, we have growth, we have alternative income. It’s three main buckets that are there to make up your overall retirement portfolio.Wes Moss [00:14:31]:
And the next big decision you need to make is, what is the percentage that’s right for you in each one of those very different buckets?Jeff Lloyd [00:14:38]:
Yeah, because all those buckets are not going to be the same size if you’re older retiree, your income bucket is going to be core filled than your growth and alternative bucket for the most part.Wes Moss [00:14:50]:
Right, exactly. So if you’re 30, it may be 100% in the growth bucket. If you’re 65 and you’re starting to pull money out, you may really like the idea of having a higher percentage in something that’s even more focused on income. It could be the income bucket, the alternative income bucket, and you’re really looking for that cash flow. But if you think about putting it all together, in going back to that equation, total return equals growth plus income. Again, we can get growth over time out of the growth bucket. We can get some growth and, again, appreciation out of the alternative income bucket, because some of those are very stock like. Think real estate, think energy.Wes Moss [00:15:28]:
But we don’t expect to get a whole lot of growth. We almost only get income from the income bucket. We’re not expecting our bonds to go up a whole lot up in price. And if you put all of that income together, the dividends and the interest and the distribution, and we’re looking at it conservatively, maybe your income, maybe the whole cash flow is only 3%, but it’s this drip, drip, drip of 3%, and then that should be year after year after year. So in any single year, it might not feel like it really moves the meter, but again, the G could be up or down ten or 20% in any given year, but over five years. So if we give it time, it’s very rare for that G, the growth bucket, to be negative. If we give stocks time, it reduces the likelihood that we end up not having appreciation. So we want to give the growth bucket as much time as possible.Wes Moss [00:16:32]:
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Think five years later, the drip, drip, drip of that 3% is now over 15%. And ten years later, it’s hard to ignore the drip, drip, drip of 3%, which is now over 30% in income for your total return equation. So the more time we have to utilize the bucket system, the more that income starts to compound in an additive way.Jeff Lloyd [00:17:50]:
Okay, so I like the buckets.Wes Moss [00:17:52]:
You like them or love them?Jeff Lloyd [00:17:54]:
I love the buckets.Wes Moss [00:17:55]:
Okay.Jeff Lloyd [00:17:56]:
In fact, I would put all four on my bucket list, okay. Along with a cruise to Alaska with some friends. But just those four buckets. And however you use them and however you film, is that all you need to be able to sleep well at night? Or is there something else?Wes Moss [00:18:12]:
They’re part of the following. There’s three other thoughts here, and these are the keys to help investors just reduce their anxiety. Sleep well at night. One, you got to have some sort of plan. The bucket itself isn’t the plan. The plan is looking out into the future and understanding how much money you think you’re going to need. And it doesn’t have to be exact. And I think investors get paralyzed a little bit around this.Wes Moss [00:18:38]:
I don’t know my exact spending. I haven’t looked at my American Express bill, and I don’t know. We know to some extent what we spend per month. We spend five grand a month. We spend ten grand a month. I talk to families all the time that know, look, every single month, it comes out to about eight grand a month. And they know. So it’s not that difficult to come up with an objective.Wes Moss [00:19:00]:
You can do a 75 page financial plan, or you can do a one page retirement timeline and map it out year after year. Look at your different income sources. Social Security one. Social Security two. For you, for your spouse pension one. Pension two. Let’s say that adds up to $5,000 a month, but you need ten. The plan says, all right, well, if we need $5,000 a month, in addition to my income streams, how much money do I need to have? The plan helps you do that.Wes Moss [00:19:29]:
Now, you can use. Speaking of how much money you need to get to at that point, you could use one of my favorite rules of thumb, which is the 25 X rule. Need five grand a month. Times twelve is $60,000 a year. Times 25 gets us to a million and a half million and a half dollars. The 25 X rule is the inverse of the 4% withdrawal rule. So it solves for that, too. So now we know that if I need that five a month, 25 X rule pretty simply says I need to make sure I’m at 1.5 million in liquid retirement assets.Wes Moss [00:20:05]:
By the way, pretty close to the one and a quarter million, which is the inflation adjusted number for happy retirees, mean it’s the average. And then the bucket system is the carriage that takes us there. It’s what gets us to the $1.5 million over time, as Wes map it out. So that’s, number one, the power of a plan. Number two, understanding cash flow. And this is one of the byproducts of the bucket system. You don’t need this when you’re 30 or even 40 or even 50, but by the time you’re in your is psychologically now we’re going back to BFI. To not have to dip into your principal and pull out and sell shares.Wes Moss [00:20:50]:
It is helpful to have at least some of or all of your cash flow needs solved by that pesky two, three, 4% a year that comes from dividends and interest and distributions. It all adds up to a cash flow. And that cash flow can give you great peace of mind. We’ve talked about how, over time, 3% over ten years is over 30% worth of accumulation, but also gives you time for the growth bucket that’s a little more erratic to end up in a positive place. Markets go up over time, but not in a straight line. And then three, the power of diversification. This is investing 101. We know this one.Wes Moss [00:21:37]:
We know we don’t want to have high concentration in any one given stock because God forbid something happens and it’s down 30, 40, 50% in a day, or something really bad happens and the company is materially damaged and you don’t ever recover. We don’t want to be overly invested in one particular area. Right now, the world is so focused on technology companies, I’ve seen investors that say that technology is the only place that’s ever going to make any money. So 100% is in tech. That’s scary to me. So diversification, of course, is multiple stocks, or etfs, or baskets of companies that have 5100, 500 different companies, so that we take away any single stock risk. But I think it goes a little beyond that to making sure we’re not overly invested in one particular sector of the market. Taking away single stock risk, which is yet another arrow in your quiver when it comes to reducing anxiety, taking another risk off the table so we can again sleep well at night, and the bucket system through that allocation of different areas of the marketplace, and then through diversification within each bucket.Wes Moss [00:22:47]:
I think it does a lot of that diversification wes, all need so that we can sleep well at night.Jeff Lloyd [00:22:53]:
Yeah, that’s what I was going to say. The power of diversification within, let’s say, the growth bucket. You got the etfs, but also each bucket itself is inherently diversified. You got bonds, you got your growth bucket with equities and etFs. You got your alternatives with the reits, the energy pipeline companies, the closed in funds, the preferred stocks, all different types of diversified income streams within those multiple buckets.Wes Moss [00:23:21]:
Jeff Lloyd agreed. We can’t control inflation, we can’t control interest rates, we can’t control who’s going to be in Washington. We can’t control what the economy does. But we can manage our anxiety when it comes to investing. And if you remember these three powerful steps of lowering anxiety, we call it sleep well at night swan, then I think you increase your chances of finding happiest in retirement because we’re taking the kind of the investment boogeyman at least off the table or at least out of the room.Jeff Lloyd [00:23:59]:
Yeah, I think that’s great. It allows retirees to worry less about the financial aspect of retirement and focus more on the lifestyle aspects of retirement.Wes Moss [00:24:09]:
It brings us back to Morgan Housel. We work all our lives to scrimp and save buck our own emotions so that we can be good investors. Just so, as Morgan Housel says, we don’t ever have to think about it or worry about it again. So that and we know the five money secrets of the happiest retirees. But if we’re really doing it right, we get to focus on the five lifestyle secrets of the happiest retiree. And that is something I think we can all work towards.Mallory Boggs [00:24:44]:
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@westmoss.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 [00:25:12]:
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 [00:25:56]:
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.
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