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Enough money

“Yeah, too much money ain't enough money” DJ Khaled

As we saw from the fulfilment curve in the previous article, we don’t need to blindly keep getting more and more to reach “enough”. Knowing how much our “enough” is (like “enough stuff”) will help define how much money we need to maintain that life.

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By now you’ve already thought about some adjustments, downsizing, and/or put some serious thought into how much stuff you actually need to be productive and happy. If not, go read the previous article again.

Now, we need to calculate how much money you would need to maintain your current standard of living.

Cash vs investments

This is a good time to start splitting your thinking about money into two: money (or cash or “near-cash” like bank accounts, savings accounts, and bonds) and investments (retirement accounts, investment accounts).

We will look at these in detail types later.

Retirement by cash (bank and savings accounts)

Take a minute to think how much money you need to live a comfortable, productive and meaningful life. Let’s say you’re 35 years old and you feel that, based on all your living expenses, your is $2,500 per month. Let’s also assume that you’re going to live the rest of your life relatively stress-free (subtract at least your commute, job, and many financial worries) and so we’re assuming you’ll live until the age of 110.

Don’t forget about inflation. You’ll have to have slightly more each year since you’ll spend slightly more each year (to keep the same standard of living throughout the years). If you’re spending $30,000 in year one ($2,500 x 12), you’ll have to spend $30,750 the next year and $186,504 by year 75.

Plotted out, your yearly spending might look something like this:

Years retired

Annual expenses

$30,000.00

$30,750.00

$31,519.00

...

$186,504.00

There are no rows in this table

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If you add everything up in the “Annual expenses” column (the sum of what you will spend in your life), it comes to $6,446,649. This means you’ll need $6,446,649 in cash (bank or savings accounts) today to retire with the comforts (or lack thereof) that $30,000 provides you each year.

Obviously, $6.5m is an amount of money far out of reach for the average person. Or is it?

Since we’re not an “average person”, we don’t try to grow our money in cash, savings and bank accounts, where it loses value over time, but rather, we invest it.

Retirement by investing (and the four percent rule)

The Four Percent Rule is a rule of thumb (with some serious long-term

data and research⁠

put into it) that states if you only withdraw and spend 4% of your portfolio each year, your portfolio won’t ever run out of money.

(Later on, we’ll look at what a healthy 4% portfolio is)

This means, that if you have $100,000 (with a certain percentage in “cash” —bonds and savings— and a certain percentage invested —retirement and investment accounts), you’ll be able to withdraw and spend $4,000 (4%) each year ($333 per month) and you’ll never touch the original $100,000, which will just keep growing. You are incredibly unlikely to run out of money if you stick to the rule.

Let’s return to our example above, where we feel comfortable with the life that comes from spending $30,000 per year (or $2,500 per month).

By keeping our money in an investment account (where it can grow over time), rather than a bank/cash account (where it will lose value over time), it means you’ll only need $750,000 to spend $30,000 during your first year of retirement (since 4% x $750,000 = $30,000). That’s a lot less than $6.5 million.

If you need to do the quick reverse calculation, you can take your annual spend times 25 (e.g. $30,000 x 25 = $ $750,000).

Not only do you need far less money to retire by investing, but by sticking to the 4% rule, you won’t run out of money. There will be $0 left in your last year when retiring and withdrawing from a savings account, but as long as you stick with the 4% withdrawal rule with investing, you’ll never run out of money, no matter how long the timeline.

(We’ll look at what a good portfolio will look like later since you’ll probably won’t keep 100% of your money invested, but some of it will be in other things like real estate, money market accounts, bonds etc.).

Here are the figures again:

Current monthly expenses

$2,500

Current annual expenses

$30,000

Years left to live

Total cash/savings needed

$6,446,649

Total investments needed

$750,000

There are no rows in this table

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Bottom line: The more you invest, and the faster you start doing so, the faster you can retire.

More notes on how much money is needed

$30,000 per year might not sound like a lot of money. It isn’t if you absolutely have to live in downtown London or New York or Sydney. It’s a tonne of money in many other places in the world.

You’ll also find that it is cheaper to be retired than it is to work. Other than drastically cutting back on transport, you’ll save on other work-related expenses such as work clothes, dining out during lunchtime, and dry cleaning bills.

You’ll probably be able to live wherever you like, not within commuting distance of your workplace, usually in expensive cities. San Francisco and New York are nice, but the average rent for a tiny one-bedroom apartment will get me a massive four-bedroom penthouse in other hipster, tech-connected and fun places like Mexico City, Cape Town, Kuala Lumpur, Bangkok and Bali (not to mention second-tier cities in the United States and Canada). SF and NYC are fun, but I can have a lot more fun for my money elsewhere, so I choose to live elsewhere. Maximum fun.

You’ll find that slow travel is a lot more rewarding, giving you the ability to soak up local culture at a slower, more meaningful, and cheaper rate. You’ll also choose when to travel so that you wouldn’t be stuck in airport queues and paying peak holiday and weekend rates for flights and accommodation.

The other thing is that our model doesn’t account for windfalls (like an inheritance) or time gained. You'd win back all the time you used to sacrifice on a job, but that doesn't mean you'd have to stop working altogether. It's just that you wouldn't need to work for money, not for stuff. You'd still be able to apply your time to things that are meaningful and even lucrative to you.

Getting to $750,000

I’m not saying $750,000 is a universal rule since not everybody will be able to retire on $30,000 per year (four percent of $750,000), but it’s good enough for our example here.

You might be married or living with a partner, with your joint investments higher already; you might be a single parent with higher expenses; you might be someone who really needs to pay down leases on a new car.

You can always adjust your “how much”, but for now, let’s use $750,000 in this example, and show how you can get there.

If you are able to invest $385 per month, starting at age 21, you’d have $750,000 by age 50, if you invested it each month (29 years of investing). If you’re not 21 anymore, you’ll just have to invest more each month to get there. (Time really is money).

You might be able to invest more than $385 –things like that tax rebate or other windfall– and that will just mean more of life left where you don’t have to work for money. You’ll have enough.

(In future articles, we’ll look at what stupid shit people spend their “$385” each month instead).

You can use a

simple investment calculator⁠

(the average return for the S&P 500 is 9%) to calculate how much you’ll need to invest, and for how long, to get to your target amount.

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Source:

AARP⁠

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To drive the earlier point home, if: you saved $385 per month from age 21 (put it in a savings account and not an investment account), you’ll have $750,000 saved up after 162 years (instead of 29 years).

Invest this much per month,

and you'll have $750,000 in this many years

$13,924.00

$4,114.00

$2,129.00

$1,222.00

$738.00

$459.00

$290.00

$185.00

$119.00

$90.00

There are no rows in this table

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In closing

First, find your retirement goal and write it down. If you’re lazy, you can use $750,000 or $1m and change it later. (You can change the currency, the four percent rule doesn’t change)

Then, based on a 9% annual return, calculate how much money per month (and how many months/years in total) it will take to get to that goal, and write those down. (It’s helpful for most to start thinking about investing 25% - 85% of your income, but we will handle this allocation later.)

Next, we’ll calculate how much you already have.

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