How Much Is Enough?

Series 4: How Much Is Enough?

A New Series

There is a question that comes up in retirement conversations more often than almost any other, and on the surface it sounds as though it should have a fairly straightforward answer.

"How much do I need?"

Sometimes people arrive with a number already in mind. It might be $1 million in superannuation, $1.5 million invested outside the family home or some other figure they've picked up from an article, a friend, a colleague or a conversation at a barbecue. The number varies, but the thinking behind it is usually the same. If I can just reach that figure, I'll know I've done enough and retirement will somehow become financially safe.

I've always understood the appeal of having a number because numbers give us something concrete to aim for. The difficulty is that after many years of sitting down with people approaching retirement, I've become increasingly reluctant to answer the question without first asking quite a few others.

How do you actually want to live? What does an ordinary year look like? How much are you spending now, and how much of that is likely to continue? Do you want to travel regularly? Is helping children or grandchildren important to you? Will you remain in your current home? Are there major expenses sitting somewhere over the horizon? And perhaps most importantly, how much financial flexibility would make you feel comfortable when life inevitably turns out differently from the plan?

Two people can retire on the same day with exactly the same amount of money and have completely different experiences, which is why I've never believed there is a magic retirement number that tells everyone when they've accumulated enough.

That's what I'd like to explore in this new series.

Over the next four articles, we'll look at what "enough" actually means, why lifestyle matters more than arbitrary wealth targets, why feeling financially secure isn't always connected to how wealthy someone appears to be, and eventually what happens when accumulating more money begins competing with the limited amount of time we have available to enjoy it.

Because before we can work out how much is enough, we first need to understand what we're asking the money to do.

The Million-Dollar Question

Australians are surrounded by retirement numbers. We hear estimates of how much superannuation a couple might need, how much annual income produces a "comfortable" retirement and how large an investment portfolio should be before someone can safely stop working.

Those benchmarks can be useful. They give people a reference point and, perhaps more importantly, encourage us to think about retirement before it arrives. Where I think we need to be careful is when a general benchmark quietly turns into a personal target without any consideration of the life behind it.

A million dollars sounds like an enormous amount of money, and it is. But the question isn't whether $1 million is a lot of money. The question is what that $1 million is expected to support, for whom and for how long.

A couple who owns their home outright, enjoys relatively inexpensive hobbies and is happy taking an occasional domestic holiday may have very different requirements from another couple of the same age who wants to travel internationally every year, maintain an expensive property and regularly help adult children. Neither lifestyle is right or wrong. They're simply different, and naturally the amount required to support them will be different as well.

The same applies at the other end of the spectrum. I've met people who assumed they couldn't possibly retire because they hadn't reached the number they'd carried around in their head for years. Once we looked carefully at what they actually spent, what assets they had available and what income sources might form part of retirement, their position sometimes looked considerably stronger than they'd imagined.

That's why retirement planning can't really begin with a headline number. The number needs to come out of the life rather than the life being forced to fit the number.

Start With What Life Actually Costs

One of the most useful pieces of information in any retirement conversation is often surprisingly ordinary: what does it cost you to live now?

People sometimes expect financial planning to begin with forecasts and investment assumptions, but understanding current spending tells us an enormous amount. Not because retirement spending will necessarily be identical, but because it gives us something real to work from rather than an imagined version of the future.

Some costs may disappear. The mortgage may finally be repaid, commuting expenses can fall and there may no longer be the same need for work clothes, lunches or other costs associated with employment. Other expenses may increase because having more free time creates more opportunity to travel, eat out, pursue hobbies and enjoy the things that were difficult to fit around a working week.

Then there are the expenses that don't arrive neatly every fortnight.

Cars eventually need replacing. Houses require repairs. Dental work appears at inconvenient times. Children sometimes need help. A major holiday may cost considerably more than the annual travel figure sitting in a spreadsheet, and later in retirement there may be health and care costs that are difficult to predict decades in advance.

This is why I prefer thinking about retirement spending in layers rather than trying to produce one perfectly precise annual figure.

There are the things you need to live comfortably, the things that make life enjoyable and then the larger irregular expenses that appear from time to time. Understanding those layers gives us a much better picture of what the portfolio is actually being asked to support.

It also makes the conversation more useful because instead of asking whether $1 million, $1.5 million or $2 million is "enough", we can begin asking what level of income those assets might reasonably support, what other income may be available and how much flexibility exists if circumstances change.

The Family Home Complicates The Picture

Australia has another interesting feature when we talk about retirement wealth: a significant proportion of many people's wealth can be tied up in the family home.

That can create a slightly strange situation where someone may be wealthy on paper but still feel constrained from an income perspective. A valuable home provides security and somewhere to live, but it doesn't automatically pay for groceries, travel or everyday expenses.

For some people, the home is untouchable. They love where they live, want to remain there for as long as possible and may hope eventually to leave the property to their children. That's perfectly reasonable, provided the rest of the financial plan can support the lifestyle they want.

Others are comfortable considering downsizing at some stage, particularly when the family home has become larger or more expensive to maintain than they need. That decision can potentially change the retirement picture considerably, although anyone who has followed my previous writing on downsizing will know that I've never regarded it as a purely financial decision. A home carries memories, community, familiarity and often decades of family history, so simply placing its value into a spreadsheet misses much of what the decision actually involves.

The important point is that "How much do I need?" can't be answered simply by looking at a superannuation balance. Retirement resources can include superannuation, investments outside super, cash, property, potential government entitlements and, depending on someone's choices, the family home itself.

How those pieces work together matters just as much as the total sitting at the bottom of the page.

Enough Also Needs A Margin For Life

If retirement unfolded exactly according to the assumptions in a financial projection, planning would be remarkably easy. Unfortunately, life has never shown much interest in following spreadsheets.

Markets rise and fall. Inflation changes. Governments alter rules. Families encounter unexpected circumstances and people sometimes live considerably longer than they imagined when they first retired.

For that reason, I don't think "enough" should mean having exactly enough money for one carefully predicted version of the future.

There needs to be some room for life.

That might mean keeping an appropriate cash reserve, maintaining flexibility around discretionary spending or building a plan that doesn't depend on investment markets delivering exactly the same return every year. For some people, it may mean working a little longer or retaining some employment income during the early retirement years. For others, it could simply mean understanding which expenses could be adjusted temporarily if circumstances required it.

This is where professional advice becomes much more valuable than a generic retirement number. The purpose isn't to predict what will happen over the next thirty years because nobody can do that. It's to look at different possibilities and understand how resilient your position might be if the future doesn't unfold exactly as expected.

I've found that people often become much more comfortable once they can see those possibilities clearly. They stop thinking about retirement as a single number they either have or haven't achieved and begin seeing it as a range of choices they can manage over time.

So, How Much Is Enough?

After all of that, it would be convenient if I could finish by giving you the number.

I can't, and I would be suspicious of anyone who could without knowing anything about you.

What I can say is that "enough" begins to become much clearer once you understand your lifestyle, your spending, the resources available to you and the amount of flexibility you want to retain.

For one household, the answer may be considerably less than they feared. For another, it may be more than the generic retirement figures they've been relying upon. Neither result is necessarily good or bad because the objective isn't to beat somebody else's retirement number. It's to make sure your financial resources are capable of supporting the life you've actually chosen.

Perhaps that's the first lesson in this new series.

Before asking how much money you need, ask what you need the money for.

Once you understand that, the numbers stop being an abstract target and begin telling you something genuinely useful about your future.

In Part 2, I'd like to take that idea a little further by asking a deceptively simple question: Enough for what? Because the lifestyle we imagine after work may be the single biggest influence on what "enough" eventually turns out to mean.