The Top Five Money Secrets of the Happiest Retirees, Part 3

Today we’re finishing up the five money secrets of the happiest retirees from the book You Can Retire Sooner Than You Think.

If you need to catch up, the first two posts in this series were The Top Five Money Secrets of the Happiest Retirees, Part 1 and The Top Five Money Secrets of the Happiest Retirees, Part 2

Now we round out the five by covering secrets 4 and 5.

We’re going to spend a lot of time on the first one because I love it.

We’re not going to spend much time on the second because while I like the concept, the book isn’t that great in this area IMO.

Let’s get to it…

Create Multiple Streams of Income

Secret 4 is one of my favorites. It goes as follows:

Develop an income stream from three or four sources, not just one.

You all know I’m a fan of multiple streams of income. Obviously having many sources of income can get you to retirement faster. But in this case we’re talking about the fact that those with more streams of income are happier in retirement.

And who wouldn’t be? Ha!

Here’s what the book had to say to introduce this subject:

The more “rivers” or “streams” of income you have, the happier you’ll be. You need to start thinking about this now. Make “multiple streams of income” a mantra and repeat it often. As usual, the proof is in the data:

  • Eighty-five percent of happy retirees have more than one source of income.
  • Nearly half of happy retirees have three income sources or more.
  • Fifty-seven percent of unhappy retirees report only one source of income.
  • The average number of income sources for happy retirees is 2.6.
  • The average number of income sources for unhappy retirees is 1.85.

When it comes to generating income, you want to create as many tributaries as possible to come together in one new, predictable larger stream.

The more (and different) income sources you can rely on in retirement, the more income stream diversification you will have. The leads to a higher sense of safety, security, and the cushion that is so important to our sense of well-being and happiness.

The data seems pretty clear — the more sources of income, the better.

Remember: every income steam matters no matter how small. The key to money secret #4 is adding as many as you possibly can.

Lots of interesting stuff here. My thoughts:

  • Remember that the secret is “Develop an income stream from three or four sources, not just one.” If the goal is to have as many income streams as possible, why isn’t secret 4 something like, “Develop an income stream from as many sources as possible”? Of if that’s too vague, how about, “Develop an income stream from as many sources as possible, with three as the minimum”? In other words, why just limit it to “three or four sources” if “the more, the better” is true?
  • Overall, I agree with the multiple sources of income suggestion (of course). The more ways you have of making money in retirement the more income you probably have. And as we’ll see soon, more income is better (up to a point).
  • But just as important (maybe more so?) is income diversification. If you have several sources coming in, you’re not so reliant on one main one and left holding the bag if something happens to that single source.
  • It’s interesting to me that the difference is so small between the happy and unhappy retirees. Basically the happy people have one more source of income than the unhappy ones.

Next he lists some potential sources of income as follows:

  • Part-time work
  • Social security
  • Pension income (state, federal, nonprofit, corporate)
  • Rental income
  • Investment income

I would add a couple to this:

  • Side hustle. Maybe he counts this under part-time work but I see working for yourself as different than working for someone else.
  • Asset withdrawal. I know this is not technically “income”, but it’s a source of funds to help pay for retirement. Surely it should count, right?

Couple this information with what’s above and it seems like almost everyone could have at least two sources of income in retirement: Social Security and part-time work/side hustle. No wonder the unhappy people are sad at only 1.85 sources. It’s likely they are living on a very limited total income.

I recommend transitioning some of your assets from growth to income several years (up to ten) before you get to retirement. That’s what we did and it’s worked out nicely.

Our sources of retirement income are as follows:

  • Rental income. We purchased our places in 2012 and 2013 in preparation for the day we’d retire. It was the right time (not too far after the real estate crash — there was still blood in the water), I had the right mentor to help me out, and I was able to take some funds and turn them into 10%+ income generators. Now if I wasn’t such a dork I would have run the numbers and discovered I was already financially independent, but I probably still would have purchased the properties. In fact, I should have purchased more.
  • Side hustle. This website is my only current side hustle, but since retirement I also bought and sold Rockstar Finance along the way, making a good income for the 16 months I owned it as well as a nice amount of appreciation on the sale. ESI Money is doing quite well — much better than I thought, hoped for, or needed.
  • Dividends. We currently generate solid income from dividends churned off by our index funds. The funds only pay 2% or so, but our assets are substantial enough that the small percentage adds up to enough to cover our annual expenses if we really pared things back.
  • Private loans. I’ve talked about these before in How to Invest in Private Real Estate Lending. I don’t have a lot invested here, but since they pay 10%, it’s a decent income.
  • Interest. We have $450k in cash sitting on the sideline earning a pittance, but at least it’s something. Part is our emergency fund but most is my “ready to pounce” money in case opportunities present themselves (a business, real estate, more private loans, etc.)
  • Wife’s job. My wife was a volunteer at our church and they loved her so much they insisted she join the staff. So she works 15 hours per week.
  • Other income. We earn about $2k per year from various sources, mostly cash back credit cards.

That gives us seven streams of income. The first three do the lion’s share of the work, but in the future we have a couple more that could be significant:

  • Social Security. Still working on when we want to take this.
  • Asset withdrawal/RMDs. At our current levels, this will be around the $100k level when we get to 72. I am currently working on the best way to deal with these (and the resulting taxes) proactively.

Next the author shares what the top sources of retirement income are:

What were the most common sources streaming toward the reservoir? Social Security was the number one answer.

The extremely happy group mostly listened pensions first as their primary source then dividend income after that. They also listed part-time work mixed with social security.

Some other source combinations that came up were corporate pensions, teacher retirement pensions, social security, rental, and portfolio income. These people know how to diversify—and I love it! These are the income streams many of the happiest people were reviewing. I want you to focus on the importance of diversifying the money you live on.

I bet you are pretty happy in retirement if you have a pension. I would be too. Pensions are few and far between these days — and quite nice to have.

It’s interesting that Social Security is number one. It shows that most people are still relying on a backup system as a major part of their retirement income. I bet the unhappy ones have it as the majority (or entirety) of their income.

Here the author also gets into the fact that diversity of income is just as important (maybe more so) than amount of income. No, he doesn’t say that outright but it seems implied to me.

Not sure what I think of that. Would I rather have one income source of $100k or three income sources that add up to $50k? I know. Depends on how solid the $100k was.

Next we move on to the amount of income that makes people happy in retirement:

The mean, or average, income for the happy group falls right around $82,770 per year, whereas the average income for the unhappy lands at $55,370. What does this reveal? A lot! More income equals more happiness—but only to a point. The place where the amount of income needed starts to level off shows yet another example of the “plateau effect.”

Now, for current retirees, what’s the magic number to reach in retirement income? I’m looking for an inflection point: the exact point where people begin to jump from “not” and “slightly” happy to “moderately,” “very,” and “extremely” happy. When I tabulate the data from these graphs, I get $72,277. Assuming a 20 percent tax rate, let’s multiply $72,277 by 0.8, which gives us $57,281 per year.

Divide that by 12 month, which gives us $4,818 per month. In other words, to reach a sense of moderate happiness, the average retiree needs to have close to $5,000 of spending money per month.

This is interesting to know, especially since I’ve written on how to have a $50k retirement. Apparently that could be renamed as “How to Have a Happy Retirement at $50k.” Ha!

But I’m not sure what these numbers mean for the rest of us. Do they mean we’re all happy if we get to $72k gross income? I don’t think so.

To me, you need to know your retirement spending needs and then plan to cover that. It could be $30k, it could be $50k, it could be $100k.

If you have $72k but need $100k are you going to be happy? Conversely, if you need $40k and have $55k will you be happy? More depends on the relationship between what you have and what you need IMO.

That’s why my guess is that those who have enough to cover their needs and a bit more are happy and those who fall short or barely squeak by are unhappy.

Income Investing

The book shares secret 5 as follows:

Become an income investor.

And it says the following on the topic:

Income investing is the method I’ve used and developed over the course of many years, and the one I find brings a lot of comfort and certainty to an otherwise uncertain practice.

Income Investing is a way to generate consistent cash flow from your liquid investments. It comes from three places:

  • Dividends from stocks
  • Interest from various types of bonds
  • Distributions that comes from a variety of investments—investments that pay distribution but don’t fit neatly in the stock or bond category.

I agree with the concept of income investing, especially as you near retirement. As such, we have structured many of our assets to produce income.

That said, the chapter that focuses on this subject could have been done much better IMO.

It could have covered the myriad of ways to invest for income along with a plan of how to approach each.

Instead it got into the technical details of the author’s “Bucket System” of investing, an approach I found both uninteresting and too complicated. I’m sure this sort of stuff plays well in a financial planning office when you’re showing a client all the work you’re doing for him and explaining the strategic importance of every move, but for someone like me who wants to do it myself, the system isn’t worth all the time and effort for a measly 4% return.

For instance, the author could have spent more time on real estate, pure dividend investing (part of his plan included this but it was muddled with many other investments), or even come up with some new way to earn 4% that didn’t require a master’s degree to understand and an engineer’s precision to execute.

I was disappointed in this section. It was the only chapter I didn’t like. I still highly recommend the book and think most pre-retirees will learn valuable lessons from it, but the chapter on secret 5 just wasn’t that good.

Anyway, that wraps up the five secrets of happy retirees. See anything that really stood out to you?


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