How Much is Enough?

How much is enough? How do we begin to answer that sort of question? Some days I think I’m close, while other days I’m miles away, adrift in the countercurrent and watching “enough” chase the horizon. Is enough a static goal in and of itself, or a constantly shifting target? These questions can quickly transcend the realm of personal finance, but let’s spend a few minutes considering the questions from the financial planning angle.

I’m wondering about this after reading some articles referring to a report from Schwab suggesting that Americans think it takes about $2.2 million of net worth to feel wealthy and $774,000 to feel comfortable. These numbers are higher than 2021 but lower than pre-pandemic levels and seem to move around a lot.

Here’s a link to the information if you’d like to read more.

https://www.aboutschwab.com/modern-wealth-survey-2022

How do people come up with these numbers? Is it someone’s best guess about how much money it takes to retire, since retiring from full-time work is usually the stated goal in surveys like this? Those numbers are averaged over the country as well, so your San Fran nest egg needs to be bigger than if you were in Denver or Houston, for example. Home equity is included, so regional economic differences impact the numbers in that way too. Additionally, who’s to say that one person’s goals and expectations are even remotely close to someone else’s, regardless of where they live. Depending on one’s situation, $500,000 can go pretty far toward funding retirement while millions in the hands of a spendthrift might never be enough.

Whatever the dollar amount, we need a better way to determine if what we have is enough, or if we’re on the right track to get there. Otherwise we end up saving blindly, hoping that we’re doing enough to get enough, so to speak. Unfortunately, this leaves the average American in their 40’s, for example, woefully behind the curve with about $106,000 in their 401(k) as of earlier this year, according to tracking updated annually by Fidelity. Maybe they’re close to Schwab’s “comfortable” number if they own a house with lots of equity, but I doubt it, at least on average.

And making this more challenging is how elusive the definition of enough is. It is a moving target. People reevaluate their goals and life interrupts best laid plans. Accidents, even serendipitous events, happen that can cost large amounts of money.

That said, here’s a basic framework for figuring out if you’ve arrived at enough:

You have no debt, or at least very manageable debt. (Debt with a fixed interest rate on principal low enough that your payments are easily covered by dependable income.)

You have sufficient cash flow to cover your recurring expenses.

You have other savings to cover unexpected costs without derailing your cash flow. But since by definition these costs are unexpected, how do we plan for them?

Peeling back the layers soon makes a simple exercise into something complicated and nerve-wracking. The first parts about debt and cash flow are relatively simple. But how can you know if you have enough when there are so many other unknown variables to consider?

This is where financial planning software comes in. We plug in the basic stuff like your assets and liabilities and known sources of cash flow. We make realistic assumptions about how much your money can grow and how much inflation we’ll have to deal with. On top of these basic inputs we add a variety of future one-off or periodic expenses. This can be replacing cars every X years, or paying for that new roof you know you’ll need but don’t know exactly when. We’ll add layers of expense for self-funding long-term care or money for helping the kids buy a first home. In short, we attempt to replicate what your actual spending pattern might look like in retirement: smooth with periods of lumpiness.

The result is a complicated set of variables that can be tweaked in a variety of ways but that can also show if you’re on the right track to being able to afford all this or, even better, if you’re already there = enough.

What’s been surprising to me during years of doing this work is just how wide the spectrum of enough seems to be. Different people have different goals, their financial situations are unique, and what’s possible can be more than they imagined. Part of this has to do with how people tend to think of having enough as hitting a particular number, as discussed above. It’s easy to fixate on that and forget that a stream of future cash flows could also be thought of as a lump sum today, even though you can’t access it in that way. Take Social Security as an example. The average benefit is currently about $1,800 per month. Assuming you get your benefits for 20 years and cost of living adjustments average out to, say, 2.5% per year, those future cash flows are worth about $345,000 today. Could you add this present value of future cash flows to your thought process about having enough?

Here’s an online calculator if you want to plug in numbers for your pension, rental income, and so forth, to gauge present value. While not technically part of your net worth, it’s a different and maybe more expansive way to consider the resources you’ll have for retirement.

https://www.calculator.net/present-value-calculator.html

A few notes on the calculator: “Periods” could be months or years and the “Periodic Deposit” could be your monthly or annualized cash flow. Keep the interest rate reasonable but you can play with it to see how higher and lower rates impact present value.

So, having enough is really about your total combined resources and how they match up with your goals over time. The balance of your savings and investment accounts at any particular point is a big part of this but won’t by itself answer the question of whether you have enough.

Have questions? Ask us. We can help.