Nine out of 10 respondents to a Capital Group/Escalent survey rated “peace of mind” as very important. If it cannot be quantified according to risk and return, perhaps freedom, time and spontaneity make better metrics.
What does peace of mind mean to you?
It is hard to define the elusive emotion of financial security, but we recognize some standard outward signs: living essentials and monthly expenses covered by a secure flow of income, no threat that income will dry up, and a prospect of maintaining current living standards.
Yet many people feel powerless whenever they think about money. Unfortunately, they are burdened with a set of beliefs and misconceived narratives that tie them down. However, once they realize they are capable of providing for themselves, they experience a new empowerment. They learn to prioritize their true motivations and eventually become as enthusiastic about cultivating their money as they are about spending it.
After you set realistic financial goals, you can focus on a newfound freedom. Without the pressure of constant money worries, you can concentrate on your chosen passions and hobbies.
Although a desire for peace of mind cuts across all socioeconomic groups, the Capital Group/Escalent survey described some counterintuitive findings. It revealed that financial confidence is in fact most prized by retirees with more modest levels of education, as opposed to graduates with college or advanced degrees; the mass affluent care more about it than those with higher net worth; and women, retired or not, pursue it more eagerly than men do.
A disciplined approach
The cardinal rule for sleeping well at night is diversification. As in all investment practices, it remains the best “free lunch” out there.
If you divide up your wealth among a mix of assets, you will be better protected against depleting the value of your portfolio in a market downdraft or loss situation. You can spread your holdings among asset classes, including stocks, bonds, certificates of deposit, high-yield savings accounts, commodities, real estate, life insurance and annuities.
After you retire, when you are no longer receiving a regular salary, you will probably need some growth in your investments to counteract inflation. Meanwhile, you might benefit from another source of income, such as a side hustle or a rental property.
It is also prudent to keep some cash liquid, to be available for emergencies such as illnesses, home damage, or repairs to or replacement of major appliances or vehicles. Many retirees underestimate optimal cash levels. For instance, a 60/40 equity/bond portfolio might require approximately three years of additional cash to ride out extreme market volatility. Another benefit of holding comfortable cash stores is you may feel more relaxed adding risk to the remaining portfolio, which could theoretically offset the idle cash.
Strategies for tapping your inner guru
Here are some potential suggestions to keep your blood pressure down:
Combine a high-paying 10-year CD with a low-cost index fund. Use a total market exchange-traded fund, letting the dividends reinvest automatically. The reinvested dividends will at least help protect you against a cataclysmic loss, such as a 50% stock decline. Even if the stock market goes to hell in a handbasket, you still get back your CD principal, assuming the government survives!
Divide retirement assets into three buckets. The first bucket contains cash for the next couple of years — not for making money but for insurance or meeting expenses, such as a new roof or a vacation. The second bucket, generating the most income, contains securities such as laddered bank CDs, bonds or equity income funds with dividend stocks. The third bucket is designed for higher growth, for longer-term investments earmarked for 10 years out, or for legacy giving. You can draw down from the income or growth buckets to replenish the cash bucket.
A fixed annuity could help bridge the gap between known income sources (Social Security, pensions) and essential expenses. Treat it as longevity insurance or a way to help you weather volatility.
Bear market years are a chance to test your risk tolerance and strengthen your relationship with your advisers, who can provide a sounding board for actionable ideas.
