How much do you really need?

2013-02-14 17.05.10My soon-to-be-nephew is having his wedding at our house; he’s an event organizer (amongst other things) so this is his opportunity to create his (and my niece’s) ideal wedding …

… we were, of course, delighted to be able to lend our house.

As he was supervising the erection of the marquee over our tennis court and false flooring over the pool, we were chatting about wealth.

During the course of discussion, the subject came up of how much do you really … and, ideally … need?

What is the Perfect Number?

If you’ve been following my blog for a while, you will know that I’ve said that you need as much passive income as you need to live your Life’s Purpose.

Even without knowing your Life’s Purpose, though, I can still tell you roughly what your Perfect Number should be:

You should aim to live no better than your closest group of friends.

Let me explain with a personal example …

We have a long-standing group of friends.

We eat often eat together. We party together. We travel together.

Not always. Not only. But, often enough.

Now, how would you feel if you travel coach, most of your other friends travel coach, but one of your friends is always at the front of the plane?

How would you feel if you like to eat out at a mid-priced restaurant once every couple of weeks with your friends, but one of your friends is always trying to arrange 5-star dining? And, 5-star hotel’ing?

I think your friend would eventually price herself out of your group of friends.

Well, I am in danger of becoming that friend.

Our friends are all quite well-off, because they are all professionals (both husbands and wives) drawing great incomes for many years. All of our children privately school together, and vacations are now flying coach (with kids) or business class (without kids), staying at international 4-star resorts at least once, and probably twice, most years.

But, our house is clearly the best in the group. Our cars are the best (and, could be better, but I’m starting to realize that I should hold back a little). And, we could be flying business class (sometimes even international first class), and easily stay in 5-star hotels.

In short, we have to be careful not to make the difference obvious.

That’s why I told my nephew (to be) – as I am telling you now: aim to live no better (but, no worse) than your closest group of friends, assuming that you wish them to remain your friends.

I can add a little more:

– Aim to be towards the top of your circle in terms of sustainable annual income.

– Aim to have a buffer, so that you can maintain that standard even if something goes wrong.

[AJC: This is not the same as an emergency fund: this means, for example living on the same $50k p.a. as your friends, but actually earning $70k p.a.]

– Aim to be able to maintain that standard of living (with buffer) when you begin to live Life After Work.

– Make sure that your Life After Work (i.e. very early retirement) makes you still ‘look’ busy

[AJC: Sitting on a beach all day while your friends still 9-to-5 it 50 weeks a year will just as quickly put you in the ‘former friend’ category as flashing your cash]

So, how much money do you really need?

Step 1: Take what your friends are earning and add 20% buffer

Step 2: Multiply that by 20

Step 3: Add the amount remaining on your mortgage (or, what your mortgage would be if you bought one of the better houses owned by your friends)

Step 4: Add any additional ‘crazy money’ that you need for some of your ‘keep busy’ Life’s Purpose activities.

Step 5: Double your final total for every 20 years until you expect to be able to accumulate that amount of money (or, add 50% for every 10 years), to account for inflation.

That should give you a very practical Number … you might even say your Perfect Number 😉

Now, you just need to go out and get it.

Be Sociable, Share!

8 thoughts on “How much do you really need?

  1. @ Jan – Great pickup! Although, it’s not strictly age-related, but it is time-related: if it takes time to get to your Number, then inflation will come into play. I’ve edited the post to add a Step 5. Thanks.

  2. @ Adrian

    Very good advice. Over time, we have gradually lost touch with the friends who are considerably wealthier than we are – primarily because we don’t wish to spend money they way they do. In the other direction, we are keeping most of the friends who earn/have less than us because we are happy to dial back the spending.

    @ jan – agree that there should be an age related component. We took our spending (tracked over several years), added 20% and assumed that we would live off 3% of that. In effect, we wanted to have a number that was equal to 40x our expected expenses. We dealt with the mortgage by treating the monthly p+i payments as an expenses.

    Why such a big number? We will be retireing relatively young and, in my wife’s case, have to assume that the money will last 50+ years.

  3. @ TraineeInvestor – Isn’t doubling my ‘Rule of 20’ to 40x – with the assumption of a commensurate delay in time-to-retirement – a steep price to pay for retirement security?

    Keep in mind that my Rule of 20 allows for a 0% withdrawal rate, if you follow my suggestions re ‘post-retirement asset allocation’ – which seems safer than 3% 😉

  4. Hi Adrian

    Not really. 20x expenses does not leave a lot of room for error – it would only take a couple of bad years with the investments to derail the retirement plan. I will sleep a lot easier at nights knowing that the prospect of ever having to search for a job late in life is all that much lower becuase I spent an extra few years at work now.

    Also underlying my thinking is (i) I have never been involved in running a business in my life (apart from a legal practice) and learning how to start and run a business is not my idea of retirement (ii) I began my career doing mortgagee sales and insolvency work – spending a few years force selling properties and shutting down businesses acquired or started by entreprenuerial types has left its mark when it comes to risk tolerance.

    Separately, if I was single I would have retired long ago with a lot less. Having a wife and two young children makes a difference.


  5. Everyone wants to be wealthy and famous but few understand the consequences. I have been struggling with this myself.

    I am a HUGE car fan. Now that I can afford one with ease I find myself unable to pull the trigger. What will everyone think? Do I want to be asked about it or how much it costs? So, which option would you rather have: no money or prospect of ever buying your dream car or have the ability but can’t do so because of the social aspects?

    Heavy is the head that wears the crown…

  6. I completely agree with you – it can be tough to be friends with a group of people when they are out of your “range” in terms of finances, or when you’re out of theirs. It sets up competition, jealousy, etc. Nothing good!

Leave a Reply