When we talk about defining “how much money is enough”, we first have to understand that there are two parts to the equation.
One, our income, is how we build two, our wealth.
What we have left after spending our income is what we can save towards building our wealth.
Perhaps the most important part that this question belies is that which is unasked: “how do I build enough wealth for the life I want?”
It’s a symbiotic triangle you have to consciously build: income yields wealth to enable your desired life.
I’ve had my personal struggles with limiting myself and knowing when “enough is enough”. We’ll get to that. But first, let’s review the quantitive process of defining “enough” for you.
How much income is enough?
While having a high income makes saving easier, building your wealth is a function of how much of your income you save versus how much of it you spend. If you have a $50,000 take-home income and spend $30,000 of it, you can save $20,000. That percentage saved, 40%, is your Savings Rate.
How much money is enough to retire?
Your savings rate defines how quickly you can build your wealth in relative terms. The amount of wealth you need to live comfortably off of and retire is relative to your spending, not your income.
A typical financial advisor (often not a fiduciary) may look at your income and use it as the basis for defining your retirement needs. This is often because income is easy to define for most people: they know their salary and can check a tax return for things like investment income.
However, spending is much harder to define as it requires consistent, routine tracking of your expenses. We’re big advocates for tracking spending as the most basic, most important element to building wealth for the average person.
Just like with health and diet, simply knowing what you’re consuming is the most basic step to making corrections that produce long term gains (or, losses in the case of weight!).
The problem with income-based retirement calculations
Here’s the problem with solely looking at the “how much money is enough” problem from an income basis:
Let’s continue our $50,000 income assumption previously. If an advisor uses this amount to work from in their calculations, they’ll assume that’s how much income you will need in retirement, too, in order to continue your current lifestyle. If you need $50,000 in income during retirement, and we follow the 4% rule (or 4% rule of thumb), you’d need to build $1,250,000 worth of wealth in order to retire.
However, in our example, you have an exceptionally high savings rate (40%) and only spend $30,000 of your income per year. If we assume you intend to maintain the same lifestyle you have today, into retirement, and again follow the 4% rule, your wealth needs drop to $750,000.
That’s a half million dollar difference!
In general, the personal savings rate is quite low, at least in the US. That makes income a pretty easy correlation to spending to make since usually, the two are near equal. Over 2019, the average personal savings rate was 7.7%.
So why do so many financial advisors make retirement calculations based on income?
- Many people don’t track their expenses but do have income information
- Most people spend most of their income anyway
- Advisors generally earn a commission tied to portfolio size, so the more, the better
Focus on your spending when it comes to planning for retirement rather than income.
How much money is enough to never work again?
As a personal example, we showcased how we became millionaires recently. Our incomes varied pretty dramatically over the time period we reviewed. Even as recently as 2009, our income was below $19,000. In our highest year, 2016, it was nearly $280,000!
Neither of these income numbers helps us figure out how much money is enough.
In fact, if an advisor worked from our income in 2016 to define our retirement needs, they might recommend we have a portfolio of $7M!
Instead, we have defined our FIRE number based on our average expenses over the last several years. We consistently spend $40-45K per year, and we feel like that gives us a life we can be happy with. At this level, we don’t feel constrained or that we struggle with spending choices. Working from $45K in spending per year, we’d need to build about $1.13M in wealth.
In 2013, we set a goal to save and invest $1.25M. That’d equate to being able to spend $50K per year, or $25K per person, in retirement with automatic inflation adjustments along the way. That gave us a little wiggle room, too.
Most people tend to spend pretty consistently, whether that’s with a healthy savings rate or beyond their income and into debt. Understanding your spending, and what your retirement expectations are, will be the most important component in defining just how much money is enough for you.
How much money is enough to be happy?
Figuring out how much INCOME or WEALTH is enough to be happy is a much more difficult and personal question. Happiness is relative: what being happy is to you can be very different from what it is to me.
For us, having enough money—whether wealth or income—is about buying time and choice. It’s about the freedom to make decisions that are most beneficial to our personal health, goals, and priorities. We don’t want to feel pressure to work simply to pay bills or stay afloat.
Sometimes, those decisions can be financially detrimental.
Perhaps your employer has demanded you to start working longer shifts, overtime. Will you be able to say no?
Maybe a project has a deadline but the underlying requirements keep changing. Can you insist that either the deadline must shift or the requirements can’t change?
Has your place of work required you to take personal health risks that seem unnecessary, simply in order to keep their costs low—maybe during a pandemic?
What if you get fired for your responses, or your hours reduced?
We want to be able to make those financially detrimental decisions, despite their monetary cost.
Statistical income and happiness
You probably remember a study from a few years ago that went viral explaining that an income of about $75,000 was where diminishing returns took over and much more income made little difference.
Emotional well-being also rises with log income, but there is no further progress beyond an annual income of ~$75,000.Daniel Kahneman and Angus Deaton
Of course, you need to remember that is an average across a wide, geographically diverse sample (450K people). What works for you could be a good bit less or more. And, as we’ve already discussed, income doesn’t necessarily dictate how much you spend—the most important element.
Still, if you want a ballpark number start from $75K then adjust for:
- Family size
- Cost of living
- Your expectations of life
These inputs aren’t fixed, though. You’ll need to reevaluate in the future. Will your family grow? Will you move from a rural to urban area or the reverse, affecting your cost of living? How will your expectations of life in retirement differ from current times?
An addiction to income and saving money
Jenni and I are in the process of transitioning to early retirement. We reached financial independence in 2018.
Sometimes I feel like I still have to make money. It’s reassuring, even comforting to do so. I still operate a business where it’s possible to sort of “turn on the tap” at any given moment to make more money. It just takes spending some money as an input to get the output of even more money.
So, sometimes I do this.
I cut deals for $10,000 on a random Thursday just to feel a little better. It’s been the hardest sort of money addiction to let go of.
I think one of the best ways to feel more comfortable and let this go, is to simply lay it all out. You’re witnessing that process unfold through this blog. Jenni and I have been working out all the details—developing plans and timelines—for years.
Watching the market collapse a few months back and seeing our net worth plummet by hundreds of thousands of dollars, in a strange way, helped. We expected a correction at some point, after over a decade of economic expansion. We still had plenty of money, and a chunk in more defensive assets if things really went sideways.
While I’m still working on it, I think I’ve mostly reassured myself that “enough is enough”.
Build the life you want, then save for it
We recently wrote our financial independence savings chronology and it helped me remember several forks in the road. We made many choices to find a balance between building wealth and being content, well-adjusted members of society.
I can remember times in the past thinking that I could sacrifice a bit more time to make more money. I could build a bigger business if a poured a little more heart and soul into it. A little more work and I could be rich.
The problem with that mentality is that there’s always more money and more notoriety.
But there’s not more time.
Would I look back and think: “I could have made an extra [$10K, $20K, $100K] if I just knuckled down!”
Or would I look back and wonder: “What happened to my family, my hobbies, …my life?”
The non-boring middle: your accumulation phase
If you’re simply daydreaming about your future retired life and not living life now, you might be taking the wrong approach. This is not a suggestion to go out and blow a bunch of money at the bar.
At the same time, staying at home because it’s almost always the cheapest choice probably isn’t healthy either.
When you, your partner, your family want to do something to take a break from the daily stresses of life, you need to have hobbies and activities you can rely on.
The solution to skipping the bar when you want to have a fun night on the town isn’t to do nothing. It’s to do something else that might be just as fun but also a little less costly.
FIRE is a novel path to life, you’re used to taking the road less traveled. Work through what the purpose of your “trip to the bar” is, find a solution to that purpose that is healthier for your wallet and your life.
Instead of the bar, maybe you and your friends get together and DIY brew your own cider or beer. That’s a hobby that’s going to take a few gatherings to get together and produce, then hopefully several more gatherings to consume and enjoy.
It could be the start of a hobby you develop a serious interest in for years.
It’s not just bars and alcohol, though.
If you’re longing for a trip to Japan you envision with your partner a decade from now when you’re retired, find a way to take a bite of that now. Getting a taste might help motivate you to stay on track while satisfying you enough to be contented.
Sit down together and watch a few travel shows to Japan. Research where exactly you want to go and what you want to do, start making the plan now while you have time.
Might a staycation satiate your desire to escape routine for a little while?
Could you take a shorter trip to Japan next year?
Perhaps you could leverage credit card rewards to fly for cheap or free? Maybe you could stay at low-cost AirBNBs while you’re there. It’d be an opportunity to do a little “field research” ahead of your much longer, more cushy retirement trip you’ve been dreaming of.
A balanced life
You may have noticed in our money history that even when we were in debt $106,000, we still took a trip together through Europe for a few weeks.
We planned ahead, buying two flight tickets during a price mistake and staying at incredibly humble hotels. Our biggest expenditure was Eurail Passes, which we managed to nab at the student rate. We figured it’d be cheaper than renting a car and give us the flexibility to do what we really wanted: see the heart of western Europe together.
Our goal wasn’t to go shopping in Milan or eat at the fanciest of French restaurants. It was simply to be out exploring that slice of the world together. We skipped everything else and it didn’t end up being all that costly of a trip. That seed of exploration has become a root of our relationship and it’s something we entertain ourselves with and think about to this day.
Did it slow down our reach for financial independence? Yes.
Was it worth it? Easily.
Finding that balance is what will let you build the life you want, that’ll serve as your motivation to keep saving.
I think for some people, at least for me, it might take hitting the extreme ends of the spectrum, hitting the guard rails on the sides—your family and your life slipping by—to shock you back to a balanced middle.
Financial independence isn’t just about building wealth, it’s about building a life. Don’t look back a decade after chasing FIRE and be the one thinking:
I built my savings, but I never built my life.
How have you managed building a life and building wealth? Let us know in the comments!