This blog post is dedicated to Jack Bogle – a life well lived. Jack Bogle passed away recently, and in his wake, left the world a better place – for tens of millions of middle class families that have used the index fund and the investment philosophy he’s developed to become investors for the first time.
Society conditions us to believe that more money will make us happier. The truth is, however, that “enough is enough.”
What do I mean by that?
1. Not having enough money to cover basic needs won’t necessarily make you unhappy – though it’s more likely
2. At the same time, having more than enough money isn’t going to be your one-way ticket to well-being, content and fulfillment
Here’s why.
The evidence from psychology
Giants in the field of psychology have known for years that having more money doesn’t necessarily make you happier – but a lack of basic financial security makes it harder to be happy.
A good place to start here is with the work of Abraham Maslow.
As human beings, we intuitively want to get to the top of that pyramid – self-actualization – to live life well, to make our dreams come true.
Yet without the basics – like food and shelter – it’s tough to work on loftier goals. Financial security falls smack dab at the bottom of this hierarchy of needs.
If you’re not able to cover your basic needs, you’re not likely to be consistently happy. Basic needs include your ability to pay rent, medical bills, children’s school costs, a family trip here and there, and not living with dread that an unexpected big expense may force you to dip into your retirement savings, take a credit card advance, or personal loan.
Economists have similar findings as well
Economic research, while varied, generally points in one direction – some minimum threshold of income matters.
First there was a landmark study by Nobel Prize winner Daniel Kahneman, along with Angus Deaton.
They found that happiness doesn’t increase after a household reaches an average annual income of approximately $75,000 (though it’s a likely much higher number in places with higher cost of living).
Another more recent study by Betsey Stevenson and Justin Wolfers, found that in general, the more money you have, the happier you are – but that it becomes harder to “buy” happiness as you become wealthier.
So basically – once you have enough money to cover your basic costs, it’s hard for more money to make you that much happier.
And of course, with all great things in life, there’s a hitch. And the obstacle is the way.
So if you’ve followed the logic thus far – you believe that some amount of happiness will in fact help elevate your baseline of happiness.
However, there is something subtle and powerful that stands in the way. It’s not your job, your financial situation, your story. It’s you.
More specifically, it’s your inertia – the lack of action that resides as a default setting in most human beings, and likely (at least at times) in you.
What does this mean for our finances? Unless we are very driven and motivated, we’re likely to neglect our finances and just avoid making tough choices – until much later than we should.
We can feel this intuitively in our financial lives.
As Prudential’s marketing team wisely points out – in general as a species, we do in fact spend more time picking emojis than planning for retirement.
Here’s where this gets really interesting. In addition to inertia, we tend to rush through financial decisions without thinking about them.
We see this all over the place in 401(k) plan participant behavior.
Professor James Choi studied the impact of automatic enrollment in 401(k) plans. In some cases – people were auto-enrolled to save a percentage of their salary. In other cases, people had to opt in to save – by toggling a checkbox on the website or sending in a form. Everything else was the same.
Their findings were stunning – auto enrollment caused a nearly 40% impact on saving.
Vanguard conducted similar studies and found that switching to automatic enrollment increased the saving rate from 34% to 90%.
One tiny change made a massive difference – that’s the power of inertia.
It matters more than ever in America today
This is critical in today’s America because at the same time many are stuck in inertia, employers are doing less to help us retire securely.
Guaranteed pensions have been replaced by the voluntary 401(k). Pensions are basically dead. We can no longer expect them to cover retirement.
So what happens when you combine inertia with the death of the pension?
Many of us are leaving our financial futures entirely to chance.
Thankfully there’s a light at the end of the tunnel. And it doesn’t require a miracle.
So now I’m happy to tell you – there is a ray of light in the financial happiness clouds, so to speak.
And the answers are surprisingly simpler than most people think. It starts with changing our core beliefs, then taking a few simple steps.
You don’t need an investment edge
One of the most damaging beliefs that many of us have: in order to retire securely, we’ll need to become a mini Warren Buffett.
We’ll need to somehow uncover and consistently deliver investment alpha, win the lottery or perfectly market-time our crypto purchases.
Einstein is famously credited for the quote that “compound interest is the eighth wonder of the world.”
It rings true. Not too controversial. Yet we fail to take action on it.
Compound savings trumps investment alpha over the long term
I used to hold a core belief that my investment choices were the most important factor in financial stability – then I read a study from Empower that changed my views entirely.
The study tells a story of two people – whose financial situation closely resembles the average US household. They both start saving at 28 and have access to a basic 401k. They save for 31 years.
The only difference is one has a financial crystal ball, and the other has the opposite of a crystal ball.
What do I mean by that?
One has a crystal ball – and always invests in top quartile of fund performance (top 25%) and saves 3% of his/her income
The other has a reverse crystal ball – and always invests in the bottom quartile of performing funds (bottom 25%) but saves 5% more (8% total).
Which one does better over the long term?
After 31 years, the family with the reverse crystal ball (but higher savings rate) has $300,000 more in retirement.
Wealth accumulation is 3 times larger than in the crystal ball scenario.
Let that sink in: saving 5% more, even making worse investments over 31 years, allows you to build 3 times more wealth.
The misperception is that it’s investment performance, not how much you save that matters. The reality is, thankfully, that it’s how much you save that matters most. And that’s fully in your control.
Another misperception – you’re not smart enough to figure this out on your own
Another core belief – it’s nearly impossible to retire comfortably. Doing this requires an amazing financial planner and a ton of luck.
In reality – it’s actually quite simple to end up retiring comfortably. The hard part isn’t what to do – it’s actually doing it.
Bill Bernstein wrote a short essay that takes less than 10 minutes to read. It’s called “If You Can” and you can find it here.
He lists three simple steps needed to historically outperform roughly 90% of active money managers, and increase your chances of retiring securely.
1. Save 15% of your income
Put it away for later. Just do anything other than spend it. This, by far is the hardest one.
2. Invest in a low cost, diversified portfolio of 3 funds
He recommends a low cost US equity index fund, an international index fund, and a fixed income index fund
But that really doesn’t matter a lot – you could even follow Jack Bogle’s advice and just hold a total stock market index fund and still likely end up doing well.
3. Rebalance annually
Just make the trades to get your portfolio back to your target ratio. If you do these steps, historically – you would have outperformed about 90% of all money managers.
The misperception is that you need a complicated approach (and a lot of luck) to reach your goals. The reality is that it just takes 3 simple steps, and anyone can do it.
There is no try – only do
The old adage that money can’t buy happiness does in fact resonate as true for good reason, backed by empirical data from economics to psychology.
However, a lack of money will generally make it more difficult to be happy.
So it’s a good idea for each of us to take steps to get out of our own way, overcome our own obstacles (especially inertia), and make saving something we automate and forget about until we hit retirement.
Your future self will be happy, and I’m sure Jack Bogle would be as well.
This blog post is based on a talk I gave last year, and I republish parts of it here in memory of the life and contributions of Jack Bogle.