Figuring Out When You Have ENOUGH

One of the topics that comes up often in discussions with friends, family members, and colleagues is how to determine when you have sufficient financial resources to step away from full-time work. It is striking how few people feel confident in determining when they have reached the level of having enough. There are thousands of articles on the web that provide advice but its hard to separate the credible content from the delusional stuff unless you spend quite a bit of time educating yourself. There are, of course, the ‘rules of thumb’ that are supposed to help, but most people are, and should be, reluctant to make life-altering decisions on the basis of such simplistic guidance. In addition, I have concluded that many people are sort of afraid to dig too deeply into the issue of determining whether they have enough because of the possible scary answers.

The basic math that is used to estimate how much income you can draw from a certain amount of savings is quite simple and worth understanding. I have written a couple of introductory blog posts on this topic. Here is one that motivates the so-called 4% rule and its variants. This is just a start, but it’s useful to understand. To go a step further, you can harness straightforward calculations in either Google Sheets or Microsoft Excel. These types of calculations provide a useful reference and help provide context for more complicated solutions provided by other sources. All of the so-called “robo advisors” have online tools that will provide estimates of how much income a given level of wealth will support and for how long. The differences between them largely come down to assumptions about the future returns from various asset classes and the correlations between these asset classes (for a deeper discussion, see this article). If you experiment with different calculators, having understood the simpler calculations outlined above, these results will make a lot more sense. As one example, I quite like the Schwab Intelligent Portfolios (SIP) calculator. Some of the calculators (but not the previously linked one from Schwab) incorporate when you plan to claim Social Security and how much you expect to receive. This is an important consideration for most people.

Beyond the mechanics of figuring out whether you have enough wealth to support a given amount of income, a fundamental question is how much income you need in order to support yourself at your desired level of comfort. This questions becomes more complicated when you can anticipate changes in your expenses over time. Specifically, if you retire before a mortgage or student loans are paid off, you will require less income after these debts are resolved.

Even the best-laid plans will encounter situations that are hard to compensate for. The goal is to consider possible extreme events and how you might be able to respond. In the event of a major market decline or an out-sized expense, what can you do? Are you willing to consider downsizing your home and/or moving somewhere with a lower cost of living? Are you willing to reduce your discretionary consumption if needed? If your retirement plan has a higher level of discretionary spending, it is easier to reduce expenses if needed. Similarly, if you are planning to leave a substantial bequest to your family or for philanthropic aims, this adds a safety factor to your overall planning. If you end up in some dire circumstance, you are likely to have the resources to cover additional expenses if your long-term plan maintains a substantial level of assets. Conversely, if your base financial plan has you depleting all of your assets in your lifetime, it will be much harder to compensate for negative surprises. For many people, maintaining some level of part-time work is a powerful way to add flexibility to a retirement plan. Ultimately, it is very important to have plans that include contingencies and how you can adapt in response.

The philosophical issues surrounding the question of how much is enough are perhaps the most fundamental. Working for income is ultimately a tradeoff of your time for money. At some point, many people will accumulate enough savings and other assets that they no longer need to work as much (or at all) for money and can afford to reclaim more of their time. When (or whether) you reach this point depends very much on how much money you need to spend in order to be happy and satisfied. Figuring out how much you “need” in order to be satisfied is particularly tricky because people tend to be very poor at predicting what will make them happy. Some people will be happy with a simpler life and more time, while others will be happier if they work longer and can afford more luxuries once they stop working. That point at which anyone would choose to make this tradeoff is highly idiosyncratic. In recent years, the FIRE movement has motivated many people to reconsider how their happiness depends on higher levels of consumption.

In summary, determining you have enough wealth to either quit or substantially scale back on paid work depends on reasonable mathematical calculations with an examination of what you value and how likely you are to be disciplined in sticking to a long-term plan. Lacking any one of these elements reduces the odds of a successful transition away from a standard working life. Figuring out when you have reached the point of enough is not especially difficult, but the process takes time and commitment and, in the case of couples, significant discussions about the issues.