5 Keys To Investing Like A Happy Retiree And Retiring Sooner

The fight-or-flight response to stress “. . . evolved as a survival mechanism, enabling people and other mammals to react quickly to life-threatening situations,” according to Harvard Medical School. Unfortunately, the very thing that helped keep human ancestry alive often hinders the investing decisions of today. Once an investor’s hackles are up, it can be difficult to make calm, objective retirement planning decisions.

Behavior is perhaps the most prominent variable and determinant of investor success. Benjamin Graham, author of The Intelligent Investor and the man many see as the father of value investing, wrote, “The investor’s chief problem—and even his worst enemy—is likely to be himself.”

Yet, it is possible and vital to control fear enough to avoid impulsive or irrational decisions. A study of nearly 2,000 American retirees conducted by the Retire Sooner Team for What The Happiest Retirees Know revealed several core investment habits that separate the happiest retirees from the unhappiest.

• Historically, stock dividend income trumps bond income by a considerable margin. When used appropriately, dividend investing can be one of the most powerful tools in a happy retiree toolkit.
• In general, investment success is less about perfection and more about participation. History shows that time in the market is typically more productive than trying to time the market because chasing its fluctuations is extremely difficult.
• Losing money feels twice as bad as making money feels good. It may not make logical sense, but it tends to be true. Unhappy retirees want to feel good in the moment, so they’re reactive. The happy ones know to take the long view.
• Happy retirees do not make investment decisions based on emotion. Happy retirees are not fueled by fear. They do their homework and make a calm decision.
• Happy retirees are tomorrow investors, not today investors. Though it may feel counterintuitive, volatility can be a productive aspect of investing. The happiest retirees know how to stick to a strategy to reap the benefits.

Stock Dividends Vs. Bond Interest

Stock dividends have consistently outpaced inflation throughout much of market history.

Though it’s commonly believed that bonds are the conservative counterpart to stocks, the chart above compares how an investment in equities for dividend income fared relative to one in bonds between 1980 and 2024. Some find the results surprising.

The study examined a $10,000 investment in the S&P 500 vs. the Lehman/Barclays Aggregate Bond Index (AGG) beginning in 1980. In each case, the investor parked the principal while retrieving (not reinvesting) the annual income produced.

In 1980, a $10,000 investment in the S&P 500 paid a yearly dividend of about $529 — 5.29% of the initial investment. Forty-five years later, it had climbed to $6,837 — a 68.4% annual yield on the original investment. And the original investment itself grew as well. A $10,000 holding in the S&P 500 in 1980 would have blossomed to nearly $544,898 without reinvesting the annual dividend income.

On the other hand, the Aggregate Bond Index only grew from $10,000 to $13,902 and would now pay out just $646 per year, or 6.46% on the original investment. Stock dividend income clearly outpaced bond interest. Annual stock dividend payouts increased almost 13 times, while the remaining price-only return grew 54 times.

Time Horizon

Future retirees often lament failing to start planning and saving early enough. But keep in mind that a 40- or 50-year-old still has potentially three to four decades of investing and spending remaining. Taking the time to create a future vision and then having the long-term patience to allow consistent dividend-growing stocks to pay out can make a huge difference, even later in life.

Furthermore, dividend investing can serve as a calming effect amidst choppy stock market waters. When eyes are set on the horizon, folks are less likely to panic with every move up and down for the stock market. Dozens of companies have a record of paying 10, 20, 30, or even 50 years or more of steady dividends. This dynamic translates to recurring cash flow that is typically reliable enough for retirees to depend upon. In simpler terms, dividend investing can be seen as an apple tree. When nourished adequately over time, a retiree has the potential to live off the apples without overconsumption, allowing the tree to bear fruit for years to come. A bigger tree means more apples, just as a bigger investment means more income paid out. However, regardless of size, the cultivation regimen remains the same: time and care.

Purchasing Power

Investing is often conceived as a means to grow one’s overall nest egg, liquid assets, and net worth. But the actual purpose is to protect purchasing power. If an investor lived on $75,000 per year during primary working years, they want to be able to live off a similar amount for the next 20 to 30 years.

The hidden variable for protecting purchasing power is accounting for inflation. The target doesn’t just stay at $75,000; it’s $75,000 plus inflation because, in subsequent years, it could require more money to afford the same lifestyle. Market history has shown stocks to protect purchasing power more consistently than nearly any other long-term asset.

Perfect Is The Enemy Of The Good: Participation Vs. Perfection

When the market is soaring, people with more money in cash or bonds often experience FOMO. They fear missing out but are unsure when to invest. Should they wait until the market drops?

It’s natural to feel that good timing is imperative for investment success, but that instinct can often do more harm than good. The amount of time invested typically impacts the results far more than the specific moment chosen to enter the market. Since no one can predict the future, the more productive answer lies in the data. The numbers are apparent when comparing the difference in growth between investing $10,000 in the S&P 500 at the “perfect” time and the “worst” time.

Note that the data points show what an investor would have as of July 31, 2023, if they had chosen to invest the $10,000 during each unique starting point rather than keeping money in cash.

Long-Term: Dot-Com Bubble

• Investing in 2000-2002
• Peak: March 2000
• Trough: October 2002
• SP 500 Performance: -49%. Some investors’ wealth was almost cut in half.
• Getting into the market with “perfect” timing (October 2002) yielded growth to over $116,00.
• Getting in with the “worst” timing (March 2000) still yielded growth from $10,000 to $61,168.

Intermediate Term: The Great Recession

• Investing in 2007-2009
• The most significant downturn since the Great Depression, with the U.S. Housing Market turned upside down.
• Peak: October 2007
• Trough: March 2009
• SP 500 Performance: -57%
• “Perfect” timing yielded growth to over $117,000.
• The “worst” timing yielded growth of nearly $52,700.

Short-Term: Covid-19

• Investing in 2020
• Economic gridlock
• Lockdowns
• No end in sight
• Media hysteria
• Tough: March 2020
• SP 500 Performance: -34%
• “Perfect” timing yielded growth to almost $28,300.
• “Worst” timing yielded growth to almost $18,700.

Understanding this market history can help investors focus on what really matters: success is less about perfection and more about participation. In every scenario outlined above, investing at the “worst” time bested holding cash by a long shot.

Keep Calm and Carry On: Be A Tomorrow Investor

Unhappy retirees exhibit a heightened sense of emotion around their investment portfolios. They confuse clickbait headlines and market volatility for permanent threats rather than temporary upsets. This is partly because losing money feels twice as bad as making money feels good. Loss aversion is a key concept in Prospect Theory, which won a Nobel Prize for Daniel Kahneman and was developed jointly with Amos Tversky. Specifically, it posits that fear of psychological pain leads people to make decisions that prioritize avoiding losses over achieving gains, even when the potential rewards outweigh the risks.

This scenario occurs quite often in investing. An account that rises from $1 million to $1.5 million and then falls to $1.3 million is viewed as a loss of $200,000 rather than a gain of $300,000. It’s also prevalent in sports. Suppose a basketball team is winning by 30 points at halftime but ends up squeaking out a two-point victory. In that case, people criticize its performance rather than complimenting the original lead despite its surplus being ultimately responsible for the win.

Happy retirees are not immune from the same instincts. What distinguishes them from their unhappy counterparts is their discipline to resist the urge. Rather than relying on emotion, they trust reason and rationality. They look at the data or trust someone else to do so and realize that remaining stoically invested over a long period provides the highest probability of success.

Bottom Line

Happy retirees are tomorrow investors, not today investors. They understand that within the U.S. stock market sits a significant number of companies that have typically shown growth over time. They know that if they invest patiently in that growth, they stand a chance of sharing the gains, and have the potential to be on a “retire sooner” path.

There are many productive strategies for managing money. The crucial step is to pick one and then stick to it. Happy retirees set out with the baseline goal of protecting their purchasing power, creating a portfolio designed to provide a steady income to keep up with or outpace inflation. They let go of the distractions and market forces beyond their control. Many rely on stock dividends to generate their retirement income so they don’t have to pilfer the principal.

Happy retirees know that by investing for tomorrow, today doesn’t have to be perfect. They are proactive but not reactive. An investment means trusting that the army of American productivity will continue to march forward over time. Having this faith can potentially give happy retirees the hope and conviction it takes to live happy, healthy lives —for themselves, their children, and their grandchildren.