How much money is enough?

The math of retirement applied to the science of happiness.

If you’re seeking early retirement I’m sure you’ve thought about this question a lot. How much is enough? This question is inevitable followed by a series of additional questions. Well, what do I need the money for? What lifestyle do I want to live? Where will I live? What will I be doing? Etc.

If you ask this question to a broader audience, say a group of friends sitting around a fire. You’ll likely get a range of pretty large numbers. In the fictional play world of having enough money, people dream big. 

I’ve heard these knee-jerk comments from a few friends in the past. “I could get by with 100 million.” “25 million could keep me busy.” I often share a snippet from Jack Bogle’s book Enough. Bernie Madoff was earning 100 million dollars per year running a legal business! Struck by greed he decided, I want more. That’s when he started the Ponzi scheme. 100 million dollars per year!  

For the more practical daydreams, the ten million dollar net worth dream is a good one. I’ve had that one myself a few times. That is more than enough plus it gives you a little walking around money to spend like a crazy person from time to time. A portfolio of 5 million for the Fat FIRE folks should do the trick. That should be enough money to live comfortably. 

Enough to survive an emergency

Let’s cover a few of the basics first. How much money do you need to survive an emergency? The relatively small and unexpected expenses of life. Car repairs, broken home appliances, or a trip to the dentist. These emergencies create real hardships for many people. 

A yearly survey conducted by the Federal Reserve shows 4 in 10 Americans would have difficulty covering a $400 expense. Only 60% of Americans have $400 ready to go in the case of an emergency. The most common approach to cover the cost is carrying a balance on a credit card. Yikes. That’s an emergency by itself! 

Enough money for an emergency fund

It’s common financial rhetoric to recommend saving 3 to 6 months of expenses in an emergency fund. It’s also stated as an important first step to improving your financial security. Having 3 months of expenses in cash is a fine goal. I’ve kept a similar amount of cash handy over the years. Life expenses are lumpy, that I know. If you’re on a roll and stacking up the cash pile. It’s time to invest! Get that money in the market and let it do its thing. 

The science of happiness

When trying to answer the question, how much money is enough to live comfortably? Let’s take a look at this study published in Nature Research Journal. This research attempts to answer this question for people across the world. 

The key takeaways from the paper. 

  • Income is associated with happiness
  • There is a point when increased income does not lead to greater happiness
  • This number varies by country

The numbers control an aggregated Globally

  • Income between $60,000 to $75,000 is optimal for emotional well being
  • Income at $95,000 is optimal for life evaluation 

Life evaluation is the term used in the paper to describe happiness. The data shows that as income increases past that point it leads to a lower level of life satisfaction. “Mo money mo problems” is backed up by data. Go figure. A man before his times, thank you for your wisdom, Mr. Biggy Smalls. 

How much money is enough to live comfortably

The people of the world have spoken, that $95,000 per year in income leads to the optimal amount of happiness. That sounds like a pretty good end goal to me. Maximizing happiness people that’s what it’s all about!

How much money is enough to retire and live comfortably

Ok. Now we know our target income number that leads to optimal happiness. Amazing. Let’s run the numbers to calculate our net worth goals. For the sake of the exercise, we’ll use all three numbers mentioned above. $60K, $75K, and $90K. We’ll also use two safe withdrawal rates. The first at 4% and the second at 3%. 

How to calculate the enough number

Perpetual well being at 4%

  • $60,000 / .04 = $1.500 million dollars
  • $75,000 / .04 = $1.875 million dollars
  • $95,000 / .04 = $2.375 million dollars

Using the good old 4% rule, we see that you’ll need between $1.5 and $2.375 million dollars to be retired and happy. 

Perpetual well being at 3%

  • $60,000 / .03 = $2.000 million dollars
  • $75,000 / .03 = $2.500 million dollars
  • $95,000 / .03 = $3.167 million dollars

For the high achievers using a conservative 3% SWR, we get bigger goals. You’ll need between $2.0 and $3.167 million dollars to live large and not worry about running out of money. In fact, there’s a good chance your portfolio grows over time.

Track and calculate your own enough number

I recommend everyone tracks their personal expenses. It’s a habit that changed my life and it brings clarity into your life. How much you need can be between as you track and reflect on the happiness gained from spending money. Bring awareness to my spending habits made it easy to reduce my expenses overtime. After years of practice, I settled into a range of spending that made sense for me. 

Spending $5,000 to $6,250 per month is more than enough to live comfortably and enjoy some of the finer things in life. I laughed to myself when I read the paper in Nature. $60,000 to $75,000 is the exact range I arrived at in my personal life ($5,000 to $6,250 per month).

Take your average personal monthly spending. Multiply that number by 12. Then divide that by 4%. That’s your personalized how much money is enough number. 

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