The last instalment of my series on financial freedom covers the approach to take in your 50s. This is the decade that most people can realistically achieve financial freedom. The basis of this series of articles is not to follow conventional wisdom but to explore a different approach to achieve financial freedom.

And a different approach is needed. Most people do not achieve financial freedom. If the definition of insanity is to try the same approach and expect different results, the personal finance version is to follow conventional wisdom and to achieve something that is out of reach for most people.

You can read the previous pieces on setting yourself up for financial freedom for your 20s, 30s and 40s

Time changes perspectives


The first article of this series focused on steps to take during your 20s to establish a foundation for achieving financial freedom later in life. The most valuable resource for any investor is time. And I argued that taking advantage of time means minimizing cash and getting as much money into super as possible to take advantage of the compounding effect of the favourable tax treatment.

Many people follow the opposite approach. The focus is on immediate needs. And retirement seems so far away. Instead, the late 40s and 50s are spent focusing on super as retirement seems more pressing. Whatever financial freedom means to you, it requires money outside of super to bridge the gap before preservation age.

During your 50s continue the approach I outlined in my previous article on your 40s. Pay off your mortgage, if possible, to remove the biggest expense in most budgets. There is nothing that provides more freedom than having a free place to stay. And concentrate on building up a portfolio outside of super as a bridge to preservation age. But there are a couple more considerations that come into play.

The value of cash


Cash gets a bad rap. And it is deserved. Over the long run returns on cash have barely exceeded inflation. From a purchasing power perspective an investor is basically treading water. But the opportunity cost of cash goes down as you age. And cash has value. It allows an investor to ride out the inevitable market volatility without having to sell at inopportune times.

I’ve defined financial freedom loosely in this series. For some people it may involve retiring early which I’ve defined as before preservation age. For some people it is cutting back to part-time or perhaps following a passion that may involve taking a pay cut. Either way this will require a source of funds to make-up for the shortfall in income.

I’m a fan of the bucket method for asset allocation. This is traditionally used in retirement, and I’ve used it to help my mother transition to retirement. But it is also applicable for gaining financial independence prior to retirement. The premise is straightforward. Assets are divided into buckets with a short-term bucket containing cash and medium and long-term buckets holding assets that have higher expected returns but more volatility.

The cash is used if the markets drops and it isn’t a good time to sell assets. If investment income is being used to fund expenses the cash can be used to address the inevitable volatility in dividend and interest income.

The average length of a bear market is 9.6 months. In that case a year of projected spending in cash is an appropriate place to start. But some bear markets stretch for longer. In recent history the bear market following the .com bubble lasted a little over 2.5 years.

The GFC bear market lasted 1.3 years. The more cash that is held the more prepared an investor is for outlier scenarios. That need for safety should be balanced with the opportunity cost of holding cash instead of assets with higher expected returns. This is an individual choice.

Is it time to transition to a more defensive portfolio?


A well-known investing maxim is that over time the composition of a portfolio should shift to include more defensive assets. For years a commonly cited rule was that growth assets should be 100 minus the age of an investor. Almost nobody follows this rule anymore. But it is worth exploring the underlying logic to consider what, if any, lessons apply to investors today.

Defensive assets including bonds and cash have lower expected returns over the long-term but suffer from less short-term volatility. And while over long-time horizons volatility matters little if an investor holds their nerve and doesn’t sell in a bear market it matters during certain time periods. One of those time periods is when investors are forced to sell assets to pay for life. There is less money invested to take advantage of market recoveries. This is called sequencing risk.

This is something that impacts investors that achieve financial freedom during their 50s. Assets are being used to pay for life. Does this mean investors need to get more conservative? Yes. But not to the extent suggested by the 100 minus the age of the investor rule.

Cash is the most defensive of all defensive assets. It has zero volatility but also the lowest expected future returns. That is why the bucket method suggests holding cash at a multiple of annual expenses to get an investor through market downturns. As previously mentioned, the downside of holding cash dwindles as an investor ages, and the benefits of cash to achieve financial independence are undeniable.

Bonds are a bit more nuanced. Volatility is a measure of how much prices change in any given period. But for many individual investors this distinction didn’t used to matter. Investors would buy an individual bond and hold it to maturity. If the bond issuer didn’t default the investor would collect interest payments and receive the principal back at maturity. In effect the investor was locking in a return at purchase since the interest rate was known. Volatility of the bond price mattered little if the bond was held to maturity.

Many people get exposure to bonds differently today. For instance, an ETF may be purchased. In this case volatility matters a lot. There is no maturity. No point in time when principal is returned. And the return can’t be locked in because the interest payments from the ETF will vary as the portfolio changes over time. Older bonds will mature and new bonds will be added. Those bonds will reflect the interest rate environment when they are issued.

And in certain conditions that volatility can be extreme. The BetaShares Global Government Bond ETF (ASX: GGOV) invests in long-term US treasury bonds. It is hedged so currency has no impact on returns. There is no credit risk. It is a passive ETF so manager skill has no impact on returns. But since January 1st 2022, the ETF is down more than 35%. The drop is related to increases in interest rates. But the point is not why this happened but the fact that it happened.

I’ve picked an extreme example. Shorter-term bond ETFs have performed better. But the point is that an investor who is trying to achieve financial freedom in their 50s needs to be more nuanced in asset allocation decisions. Given increasing lifespans getting too defensive can be a mistake. Getting too defensive using an ETF or fund to gain exposure to bonds may not be the best way to truly remove volatility from a portfolio.

Consider a barbell strategy. Keep investing in growth assets like shares. And balance that with cash which has no volatility, protects against temporary market drops and has the utility of helping to meet unexpected expenses that may come up as employment income drops or goes away.

Financial freedom


This series of articles is a blueprint for achieving financial freedom. It starts in your 20s but most people will likely read this later in life. Decisions have been made and while course corrections are possible it is unlikely that it can be followed step by step. But that isn’t really the point. My hope is that the lessons and perspectives will help any investor.

This approach is largely based on my own investing approach and investing for my retired mother. Some of it is based on good decisions that I would make again. Some is based on mistakes I’ve made and the alternative paths I should have taken. I hope they have helped investors design their own pathway to financial independence.