How much is enough?
I recently stumbled across the following anecdote, which I believe to be a true story…
Authors Joseph Heller and Kurt Vonnegut were chatting at a party being hosted by a billionaire hedge-fund manager. Vonnegut informs Heller that their host made more money in a single day than Heller had earned from his popular novel, Catch 22, in his entire life. Heller’s response to this was, “Yes, but I have something he will never have… Enough.”
I thought this was a great little story and the sentiment is central to what I mean when I talk about knowing your money and, particularly, how much money you will need in the future.
The first step to knowing how much money will be enough in the future is to work out what makes you happy and how much this happy life will cost. Remember, science suggests that the stuff that really makes us happy doesn’t cost a lot of money – good relationships etc. If you think that fast cars, big houses and fancy wine is what makes you happy your enough is going to be a lot further away…and maybe, like the hedge-fund manager, you’ll never have enough.
Everyone’s enough is going to be different, but the important thing is you have some idea how much enough is. If you don’t know how much enough is, you’ll never know when you’ve achieved it. You’ll always be fearful that you still haven’t got enough and this fear will drive you to continue to work hard and save money…perhaps at the expense of your relationships and doing the things that are close to your heart. You’ll never have that inner peace that from knowing you are financially secure and can live the rest of your life as you desire.
So, how do we put a figure on enough? How can we work out how much money we need to save to be able to life a happy, secure retirement? Here’s a (very) basic rule of thumb – The rule of 300.
· Work out the monthly cost of your desired lifestyle.
· Subtract any expected guaranteed monthly income in retirement (i.e. final salary pension, state pension etc.)
· Multiply by 300.
So, if you’ve worked out that you need to spend £2,500 each month to live a happy life and you’re expecting a state pension of £600 each month you will need to build up a ‘savings pot’ totaling £570,000. This savings pot will include your bank savings, investments and pensions.
£2,500 – £600 = £1,900
£1,900 x 300 = £570,000
This is based on the assumption that a ‘safe’ rate of withdrawal from a savings pot is 4% p.a. over a 30 year retirement.
Of course, these are very general rules of thumb and don’t take into account individual circumstances or unexpected economic or political events. However, they are useful to give a rough guide to how much money might be enough.