Find Freedom In Retirement With These Core Financial Principles

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We have been presented with immense financial challenges in the past two-plus decades. The Dotcom Bubble sent stock prices down nearly 50% between 2000 and 2002, the Great Recession and Housing Crisis of 2007-2009 cratered stocks more than 55%, and the COVID-19 Pandemic and shutdowns sent stocks tumbling 30% in a month’s span—leading to massive inflation and high interest rates thereafter. Recent days have been no less arduous. The incumbent president dropped out of the race mere months before election day, and the other candidate narrowly escaped an assassination attempt.

Sticking to a sensible retirement strategy while accounting for the unknown future market ripples of frenetic world events can feel overwhelming. Furthermore, the media can often drive a negative and noisy narrative. Learn to filter some of that out to give yourself space to notice the positive.

Zooming out to a wider perspective might help.

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According to Bloomberg Terminal Software Data, the Dow Jones Industrial Average (Dow) was nearly 10,000 in January 2000. Despite all the aforementioned economic carnage since then, at the end of July 2024, the Dow stood close to 40,000 with a total return of over 530%, including dividends. Someone who had invested at the very beginning would now have six times their original money. The story is nearly identical for the S&P 500 , which has risen over 275% in price and over 495%, including dividends, from January 2000 through July 2024.

In other words, market history shows a consistent pattern of rebounding back to prosperity. Investing isn’t rocket science but takes time, patience, and discipline. There will be plenty of speed bumps and potholes along the road to financial independence, and investors need mental endurance to stay the course. As with any journey, it helps to have a map. The following financial principles can help create yours.

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Financial Principles

Consider Owning Stocks

Over time, U.S. equities are typically the most effective way to stay ahead of inflation, but the all-in strategy doesn’t always sit well with nervous investors. Diversifying with some percentage of safety-type assets like fixed income and cash may potentially maximize equity exposure at a more tolerable level. The specific percentage can vary for each person depending on their financial goals, objectives, and risk tolerance. One option could be three years' worth of dry powder . In finance, dry powder means the cash reserves a company or individual maintains to meet obligations in times of economic stress. Dry powder equates to the various ways to fill your Cash (savings, money market, certificates of deposit) and Income (treasuries, municipal and investment-grade bonds) buckets.

For example, if your annual spending is $100,000, you’d multiply that by three to determine a need to save $300,000 worth of dry powder. If your tolerance allows, the rest could be invested more aggressively in equities to help protect against inflation over time.

Invest With Patience And Longevity

The adage that today’s shade comes from the forethought of planting a tree years ago is the perfect analogy to describe financial growth. Like a giant white oak, investments often take decades to mature into robust assets. Impatient investors would be well served to tweak their mindset because there is usually no shortcut—time in the market typically beats timing the market.

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Diversify Your Investments

Diversified mutual funds were considered an essential component of any long-term investing strategy for years. Today, the sentiment remains, but the execution has shifted mainly to their ultra-low-cost cousins—ETFs (exchange-traded funds). A collection of ETFs frequently encompasses several hundred stocks, effectively using diversification to gird the chassis of your retirement planning vehicle. Owning some individual stocks isn’t necessarily harmful as long as it’s not at the expense of diversification.

Know When To Seek Advice

Investing has become both easier and harder over the years. Information is free and nearly limitless, most investment options are highly accessible, and diversification has become inexpensive. Yet, these positives have led to a more confusing and challenging environment. Still, a sizable portion of the population does navigate their own personal investments alone. Others find it invaluable to seek occasional or consistent professional guidance.

Have A Plan

It may be tedious to create a robust budget or financial plan. Calculating expenses and compiling a list of life goals is hard work. If there were an easier way, I’d happily share it, but I believe the entire exercise is critical to long-term success. As Benjamin Franklin purportedly said, "If you fail to plan, you are planning to fail."

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Create A Retirement Strategy

Financial advisors can help you formulate a retirement strategy, including future spending goals, inflation protection, portfolio allocation, and probabilities of financial success. There are also online tools that can get you started on the basics with varying degrees of detail. Here is an interactive financial planning tool our team created that pairs happy retirees' lifestyle habits with steps to fund them. Do some research and find the right fit for you. Remember that no plan is perfect—getting started is often more important than the specific method. Listen to famed Vanguard founder John Bogle, who said, "The enemy of a good plan, or really any plan, is the dream of a perfect plan or the perfect plan that you never get around to."

Bottom Line

Like any stage of life, retirement can have its ups and downs. The goal of planning and investing for the future is to remove financial anxiety from the equation once the primary income ceases. If you can sleep well at night, unbound from the fear of exhausting resources, you can instead focus on the perks, passions, and peace that are there for the taking.

Unfortunately, there is no magic formula or secret shortcut to accumulating wealth. While time, patience, and planning may not sound as exciting as news about the hottest new stock, it can do much of the heavy lifting for you in retirement. Utilizing these foundational principles can help increase your probability of achieving the financial freedom many happy retirees enjoy.

By Wes Moss, Contributor