What the Happiest Retirees Know, Three Top Money Habits of Happy Retirees

Today we continue our coverage of the great retirement book What the Happiest Retirees Know: 10 Habits for a Healthy, Secure, and Joyful Life. It is packed full of solid information and statistics about the state of retirement today.

If you’ve missed any posts in this series, there are two ways to catch up. You can begin with the first post, which is an introduction to the book, and click through to the next posts at the end of each one you read. Or you can check out my retirement category and scroll through the posts there.

Like with other books I’ve reviewed on ESI Money, I will share some key passages from this one and give my thoughts on their conclusions.

Let’s get started…

Money Habits of the Happiest Retirees

Today we’ll look at the top money habits of the happiest retirees — what they do financially that makes for a great retirement.

Turns out there are “three core, actionable money habits that nearly all HROBs (Happiest Retirees on the Block) have in common.”

Here they are…

1. At least $500,000 in liquid retirement savings.

I know, I know. This seems low to me as well.

We’ll get to that in a minute. For now, let’s see what the book says on this subject:

That’s the inflection point for happiness: half a million. A net worth beyond $500,000 doesn’t have nearly as much impact on higher happiness levels as getting to $500,000. Meaning, even as your savings continue to climb, your happiness won’t necessarily rise at the same rate it did from zero to $500,000. Liquid retirement saving simply means that this is money you can access with ease, such as stocks, bonds, mutual funds, ETFs, cash, etc.

Retirees with around $100,000 reported feeling unhappy or just slightly happy.

Of course, $500,000 may still sound like a lot of money, especially if you’re a twenty- or thirtysomething who’s still accumulating wealth. I’m not saying half a million is chump change. But it is a much more attainable goal than $2 million, and no matter your income level, you have a better chance of reaching it.

How? You start by budgeting.

So there you have it. The secret to a happy retirement isn’t having $2 million in the bank, no matter what Suze Orman may tell you. On a recent podcast, Orman raised eyebrows with a bold statement about how much money people need to retire. “You need at least $5 million;” she said, “or $6 million. Really, you might need $10 million.”

Happiness in retirement is about having a simple plan, getting started, and being committed to having a least $500,000 saved up by the time you retire. The vast majority of the HROBs featured in this book do not have millions upon millions in retirement savings and they were still able to stop working and live joyful fulfilling lives.

Lots to comment on here:

• Let’s start with this: “At least” $500k. Not simply $500k, but “at least” this amount.
• Also notice the other wording he uses: “A net worth beyond $500,000 doesn’t have nearly as much impact on higher happiness levels as getting to $500,000” and “even as your savings continue to climb, your happiness won’t necessarily rise at the same rate it did from zero to $500,000.” What he’s really saying is that at $500k you’re happy, but not as happy as those who have more. Happiness does increase after $500k, just not as much as it did to get to $500k.
• Personally, I’m a lot happier at $6 million than I was at $500k. I know I’m a datapoint of one, but I think many others would agree with me. Now maybe $6 million is over-kill, but I would guess that peak happiness for the average American would be at something like $1 million to $2 million.
• $500k is not that much if you’re planning to live off it. At 4% withdrawal rate, it’s only $20k per year. You better have pretty low expenses and/or a lot of income from somewhere or you’re going to be eating macaroni and cheese every night in retirement.
• As for the $100k number, I don’t know how people can retire with that little — unless they have large sources of income from somewhere (which we know most people do not have). So I can see how you’d be unhappy at $100k savings.
• Yes, $500k is much easier to attain than $2 million which is much easier to attain than $5 million which is much easier to attain than $10 million and on and on. So what’s the point? If we’re talking about what’s easy to attain, saving nothing is very easy to attain. Unfortunately this seems to be the goal for a large number of Americans.
• I do agree that you need to know what you’ll be spending in retirement (or at least what you’d like to spend) as part of creating a great retirement plan. This is not something you should guess at and as you get closer to retirement you will need to get more dialed in to your retirement spending. I suggest having an initial retirement budget at least 10 years in advance to see where you are in relation to spending and savings. Then another budget check at five years out — and every year thereafter until retirement.
• We did a retirement budget for the first couple years after I retired. I needed the assurance that we had enough. Once I had that and knew we had more than enough, I stopped doing a budget (though we still track spending through Quicken).
• Suze Orman has been living in NYC too long. lol. If you go by what she says you will probably never retire.
• I do think that you need to plan retirement in advance — both the money and life sides — and if you do the odds are that you’ll have a much better retirement than if you do little to no planning.
• Just wondering, what number would classify you as having “millions upon millions”? $5 million? $10 million? More?

Out of curiosity I Googled “how much net worth do Americans need to be happy?” and came up with these:

This Harvard Study of 4,000 Millionaires Revealed Something Surprising About Money and Happiness. Some key quotes and my thoughts:

• “What they found is that people with a net worth of $10 million are significantly happier than those in the $1 million to $2 million range.” Hmm. That debunks my thoughts above.
• “But not all decamillionaires are equally happy. The one factor that makes some of them happier than their equally wealthy peers comes as no surprise — making the money themselves instead of inheriting or marrying into it.” There is a “satisfaction value” in earning your own wealth.
• “Researchers have found that above a certain point more money does not yield much more happiness. As Donnelly and Norton wrote, ‘The relationship between money and happiness has been studied for decades, and typically shows that money matters for well-being, but with diminishing returns: the difference in happiness between people with incomes of $50,000 and $75,000 is larger, for example, than between people with incomes of $75,000 and $100,000.’ ” I included this because it’s yet another example of the mainstream media not understanding the difference between wealth and income. Sheesh.
• “Using a 10 point scale of happiness, they found that respondents with more than $10 million were happier. As they wrote, respondents with ‘a net worth of roughly $10 million or more–reported greater happiness than those with a net worth of ‘only’ $1 million or $2 million. The effect is significant, but small, with the very wealthy roughly [0.25 points] happier on a 10-point scale. Additional millions are associated with additional happiness, but not in life-changing magnitude.’ ” So it appears the more you have, the happier you are…even if the happiness increases are ever-so-small.
• “In an ironic twist, the researchers found that there is one thing that decamillionaires can do to get even more happiness — give it away.” Hahahaha. Score one for giving!!!!

Here’s how much money you need to be happy. This article is absolute trash. How can Google rank this so highly? A few quotes:

• “The idea that money can’t buy happiness has been disproved by science, at least up to a point. Experts say that happiness does increase with wealth, but the correlation peaks at earning $75,000 per year.” The key words that show they don’t know what they are talking about — they use “wealth” and “earning” interchangeably.
• “What would that lavish, fulfilling, having-it-all lifestyle cost? $100 million, says Vanamee.” This is (supposedly) the ultimate level of happiness. Hahaha. Yeah, right.
• “Others, however, argue that there isn’t actually a number that can be nailed down. ‘The number is less relevant than how you earned it and what you’re doing with it.’ ” Finally, they get to something that I think makes sense.

This is how much money it takes for millionaires to be happy. One main thought here (it from the same study referenced in the first article):

• “Harvard’s new research reveals that the price of happiness is pretty steep: It seems to be around $8 million to $10 million. Only at these levels ‘are wealthier millionaires happier than millionaires with lower levels of wealth,’ says the study, revealing that in one group, millionaires who hit the $8 million mark reported higher life satisfaction than those with $7.9 million or less, and in another, those with a net worth of over $10 million were significantly happier than those with lower levels of wealth. But even then, it is only associated with ‘modestly greater well-being.’ ” Pretty interesting, huh?

In the end, I’m not sure we learned anything other than trying to equate money and happiness is a hard thing to do. LOL.

2. A mortgage payoff that is complete or within sight.

Hahahahaha. People’s heads are exploding right now.

We’ll get to my thoughts in a minute, for now, here’s what the book says:

This is a big one. I believe the happiest retirees enter post-career life either mortgage-free or within five years of hosting a mortgage-burning party.

The argument you’ll hear from the camp of pro-mortgage pros is that you can do better by investing your savings as you continue to pay interest on your house. As an example, these planners say that, instead of using $100,000 to pay off a 4 percent mortgage, you should invest it in the market, where you could see a return of, say, 8 or 10 percent. The result: a net 4-to-6 percent gain.

Hmm. This logic looks good on paper, but it may not hold up as well in the real world. As we all know, the market can drop or stay flat for relatively extended periods of time, and our gains should be measured in decades, not years. And since the average lifespan of a mortgage in the United States due to frequent housing moves is less than 10 years, this timeline might not work.

I’m a believer in the One-Third Rule. If you can pay off your mortgage with no more than one-third of your nonretirement savings accounts, you should consider doing so. For our purposes, nonretirement simply means after tax brokerage or savings accounts, not your 401(k), IRA, or retirement savings plans from work. If you owe $50,000 and have $160,000 in savings, drop that bomb on the mortgage. You will still have $110,000 in liquid assets to ease you along the retirement road.

In addition to financial considerations, think about how your mortgage affects your emotional health. I’ve learned from the happiest retirees that there is a real sense of peace and serenity that comes with knowing you own your house free and clear. It just feels good as you enter a new phase of life that is chock-full of changes.

Eliminating a house payment also dramatically lowers your monthly retirement living expenses, taking the pressure off your nest egg and other sources of monthly income. This step leaves you with more money to follow your dreams and passions — for travel, hobbies, or charitable giving. In other words: your core pursuits. That’s what a happy retirement is all about.

My thoughts on this:

• To be completely open and let you know where I’m coming from, we paid off our mortgage several decades ago and have been debt free since.
• Back when we paid off our mortgage, things were a bit different — our rate was something like 8% or 9%. So paying it off seemed like a no-brainer. Much different than today.
• We were also coaching people during this time, so to say we were debt free other than our mortgage and paying off our mortgage too (and then, later, having paid it off) was an example to others of what could be done (because most thought it was impossible).
• The Millionaire Money Mentors have debated the payoff versus invest question for a long time and there’s no true consensus (though most are in the “invest” camp).
• There’s really not a “right” answer here — at least in advance. Afterwards there’s always a right answer. For us, it was right to pay it off. For many having low interest mortgages the past decade or so, it was right not to pay them off (at least financially right). But again, we only know this after the fact. So if you can read the future, you will have the right answer. Otherwise, it comes down to a guess, risk tolerance, and personal preference.
• I think time frame can also be a big part of the decision. If you’re talking about a 30-year window, then the case for holding a low interest mortgage is stronger IMO. We know that over long periods of time, the market has returned 10% or so (and thus we assume that will continue). So in 30 years you can be pretty sure you’ll beat paying off your mortgage. Then again, if you’re looking at ten years, like the author quotes above, the market could do anything in that period…including going negative. That makes the decision harder.
• If you decide to keep the mortgage, the way it works out being a better financial decision is if you save/invest the amount you would have put toward paying off the mortgage. If you spend it instead, it’s not a better deal. If you save/invest half of it, it cuts your total return dramatically. And while the readers of this site might be disciplined enough to do this, we all know what the habits of the average American are. No way he saves/invests this. It’s way more likely that he keeps the mortgage and spends almost all of the amount he should be investing. In this context, I think a book for the masses (like this one) does well to recommend paying off the mortgage.
• If investing is better than paying off a mortgage, anyone with any amount of equity in their home up to the full amount they could borrow is making a poor financial decision by not fully mortgaging their home. So, if you are in the “invest” crowd, I am interested if you have the maximum possible borrowed against your house and continue to borrow more against your home equity as property values grow. After all, that’s the wise financial move, right?
• I’m not sure about the One-Third Rule. I think it depends on too many factors to be a useful tool.
• “In addition to financial considerations, think about how your mortgage affects your emotional health.” I can attest to this. Not owing a penny to anyone is an amazing feeling.
• “Eliminating a house payment also dramatically lowers your monthly retirement living expenses.” Housing is generally the largest single item in a person’s budget. Eliminate this cost and you’ve suddenly made retirement a lot more affordable (and are able to take it sooner).

In the end, the choice is up to you. I’m happy with the decision we made at the time. Not sure what I’d do these days if I was 30 and starting out, but knowing my wife’s hatred for debt, I bet we’d pay off the mortgage. 😉

3. Multiple streams of retirement income.

Ok, so this makes sense.

If you have $500k saved up AND you have multiple streams of income, having a good level of retirement spending is much easier (and thus accounts for much happier retirees).

More on that in a moment, but let’s first review what the author says on this subject starting with his “Rich Ratio”:

Here’s how to determine your Rich Ratio:

First, calculate your total monthly income. If you’re still working and looking for the ratio you’ll likely have during retirement, then use projected values. Remember to consider all possible retirement income streams: paychecks from part-time work, Social Security and/or pension benefits, rental income, miscellaneous sources, and, of course, the amount your investments should produce. Also, make sure to adjust this number for taxes so you have a “net income” number to work with.

Now that you have an income figure, it’s time to calculate your needs. To do this, simply use your projected monthly retirement budget. With these two numbers, our equation looks like this:

Have ÷ Need = Rich Ratio

For the more visual folks out there, why we want a ratio of 1 or more may be clearer now. The reason is that we want what we have to be greater than what we need. In economics, supply and demand ratios fluctuate, but when it comes to being a happy retiree, what we have (supply) must always be greater than what we need (demand).

This system works regardless of your income level. A Rich Ratio greater than 1 is fantastic. A Rich Ratio under 1 means there is room for improvement.

When it comes to generating income, it’s a good idea to go from relying on one income stream to many.

Essentially, you’re creating as many tributaries as possible to come together in one new, predictable, larger river of income. You likely already have ideas about where you can gain other sources of income. These could include multiple pensions, Social Security, rental properties, investments, or part-time work.

Lots to comment on this one, but let’s begin with the Rich Ratio. I’m not a fan.

In Wes Moss Interview on the Happiest Retirees I asked about the Rich Ratio and we had this exchange:

Me: I’m having trouble understanding the “Rich Ratio”. Not understanding the concept but more understanding the name. Does it really mean the person is “rich”? It seems if your ratio is 1 you simply have income equal to expenses, which doesn’t seem too rich, it seems like “barely making it”. Can you tell us why you think it makes someone wealthy?

Wes: There are many definitions of “rich” but I guess it really comes back to these happy retirees we’re talking about. Happy retirees are “Masters of the Middle” in that they’re not looking to keep up with the Jones next door. They’re more interested in maintaining a lifestyle that they’ve found brings them joy.

So sure, being able to cover your expenses might not make you rich like the Kardashians, but it does allow for a rich life filled with a wealth of experiences and people that you care about. What’s not rich about that?

I’m still not a fan.

To me the formula he has above does not make you “rich”. It makes you “break even”, “barely covering expenses”, or “meeting your needs”. But those names aren’t as sexy as “rich”.

Now if your “needs” include everything you could ever want or imagine, then yes, it may make you feel “rich”. But I don’t think that’s what he’s talking about when he lists “needs”.

So I remain a non-believer on the Rich Ratio. And I certainly don’t think “A Rich Ratio greater than 1 is fantastic.” I would say it’s just enough to get by — far from fantastic.

What would be a “Rich Ratio”? Two times needs? Three times? Something else? Let me know your thoughts.

That said, I am a big believer in multiple streams of income.

I like having many ways to make money, I like them to be varied, and I want them so not a single one dominates the other.

As I write this, I have the following sources of income:

• ESI Money
• Millionaire Money Mentors
• Real Estate Syndications
• Dividends
• Private Loans
• Interest

The first four could individually almost pay for our entire annual living expenses by themselves (and they certainly could if we pulled back on spending just a tad).

I have another source I’m working on as I write this (classes/courses) and someday may even see Social Security. Ha! So there could be more sources on the way!

That’s it for this time. To read the next post in this series, see What the Happiest Retirees Know, Developing Core Pursuits and the Benefits of Volunteering.