When Is enough (money) enough? A simple step-by-step guide

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A Surprising Problem

We're all familiar with the problem of poverty - of not having enough. Some of us know it from reading about it, other from painful personal experience. A less-well-known problem hits people on the higher end of financial success — not knowing when enough is enough.

If you’re a successful professional (or on your way to becoming one), you’re probably working too hard. You may not be taking the time to be with your family, taking vacations and recharging, working out, or simply taking some well-deserved down time.

If this describes you, how will you know when you have enough? You can always aspire to more. If you’re like most of us, you haven't made your first million, at least not yet. But if and when you do, reaching the second million is much easier. Reaching the third, fourth, fifth, tenth, etc. becomes progressively easier. However, at some point, making the next buck makes no appreciable difference in anything you (should) care about.

At some point, making the next buck makes no appreciable difference in anything you (should) care about

My Personal Definition of Having Enough

After thinking about it for a while, here’s how I define my personal "enough point." It’ll be when I can live on what I’ve accumulated, no matter how long my retirement is, without eating into the principal. This is what’s also known as the FIRE point, for Financial Independence, Retire Early (though in any particular person’s case, it may not be all that early).

My personal "enough point" is when I'll be able to live on what I’ve accumulated, no matter how long my retirement is, without eating into the principal

Why I want to leave all that principal when I die is the subject of a different discussion, but for now, let’s take it as a given.

How to Calculate the Dollar Amount of Your Personal “Enough Point"

Here’s my simple, step-by-step guide on calculating the above point in actual dollars:

Step 1. Estimate your retirement budget total

Even if you know what you spend these days, figuring out accurately how that will change over the years and decades until you retire is not simple. Some spending categories such as travel, entertainment, and gifts will go up. Others, such as contributing to grandkids’ college funds will get added. Yet others such as gas and car maintenance will likely decrease. Finally, some, such as mortgage payments, may disappear altogether (assuming you pay off the mortgage by then). With so many unknowns, the simplest way to estimate your retirement budget is to take 100% of your current net income, and subtract what you set aside for savings. For example, if your income is $75,000 and you invest 20% of that or $15,000 (way to go!), your guesstimated total retirement budget would be $60,000.

Step 2. Subtract expected income that’s not from your portfolio

Any income you expect to get in retirement that doesn’t come from your portfolio means that you don’t need to set aside as much. Some examples include annuities (if you bought any, I haven’t), pensions (if you’re lucky enough to have one of those, I’m not), Social Security (not yet, but someday), rent from properties (minus the expense of owning them), royalties (none of those here), etc. 

Let’s say you don’t have any annuities, pensions, or royalties. Let’s further say you have a rental property that you expect will bring in a net positive cash-flow of $6000 each year, and that you expect to get $25,000 from Social Security. I’d reduce that last by 20% since that’s the size cut that will be needed by 2035 if Congress doesn’t do anything, so make Social Security $20,000.

Subtract from the $60,000 example we got at the end of Step 1 the $6000 net rental cashflow and $20,000 reduced Social Security benefit, and we reach $34,000.

Step 3. Add back enough to account for taxes

Essentially, you need to estimate what your pre-tax total income needs to be, given that it will likely come from dividends, selling some bonds and/or shares of stocks, and Social Security benefits, to cover your budget with a bit of margin.

The exact amount will depend on where you live in retirement, and your personal mix of income sources in retirement. For our example here, let’s assume your overall tax burden will be 20% to get you to the $60,000 you’ll need. Divide the $60,000 by 0.8 and subtract out that $60,000 ($60,000/0.8 – $60,000 = $15,000), and you get an estimated total tax burden of $15,000. Add this to the $34,000 from Step 2, for a total pre-tax $49,000 that will need to be covered by your portfolio.

Step 4. Multiply by 25

Using the well-known 4% rule, you need to divide the $49,000 by 0.04 or equivalently, multiply by 25, bringing us to $1,225,000. If the above numbers and assumptions were all true and accurate for you, once your portfolio hits $1,225,000, that should be your personal “enough” point.

Then, “all” you need to do is set aside and invest enough each year to get to that point (hey, I said it’s simple, not easy :)). Oh, and I’d also suggest you create a backup plan for making a bit of money in retirement just in case your investments underperform to the point that they don’t make 4% above inflation (which many experts expect to be the case).

Needless to say, working as an employee makes the above difficult, requiring life-long discipline, hard work, and frugality. Becoming successfully self-employed makes it far easier (though still not quite easy).

The Bottom Line

It's too easy to get into the habit of working too hard, and never take your nose off the proverbial grindstone. Following the above steps can help you figure out when you've reached your own personalized Enough Point, at least if you agree with my thoughts on what that point should be. If you have a different definition of that point for yourself, (a) it's completely ok, just having a target in mind will help you avoid overshooting by too much, and (b) please share your definition in a comment, and preferably share your strategy on reaching it too.

If you'd like some help articulating your personal finance goals, defining your own enough point, and crafting a plan to reach it, email me and we'll set up a free no-strings-attached call.


This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.

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