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Saving Enough?

07 03 06 21 19

-------- When Enough Is Enough?

I believe that you have saved enough only when you can be sure that you will be able to maintain your current standard of living forever or at least until you are a hundred years old. You must make sure you can do it without working, as there will be moments in your life when working will not be an option due to sickness, age, family situations, or the pure and plain fact that you don’t want to.

If you believe you can sustain yourself at your current level forever by working at your current job / profession or performing some other active income generating activity, you are deceiving yourself.

If you can’t cover your current standard of living forever, without working, just using your savings and investments, you are putting yourself at risk and you will be at risk until the point you can meet that condition. You are making yourself a subject of the economy, the labor laws (which could improve or deteriorate), the job market (more jobs shipped overseas), and the simple will of your employer. If you can’t be financially free, at your current level of living then you should do one of the following:

• Save more. You are not finished saving yet.
• Reduce your living standard to the point it meets your passive income potential.
• A combination of the above

This is Over Time, isn’t it?
Yes, the amount of money needed has to be saved over time. Unless you suddenly inherit a lot of money form a long lost rich uncle, you probably can’t save it all overnight. However, you also have to consider that the more you wait to save enough, the more risk you run of being in a situation where you can’t cover your current standard of living from passive income, and you can’t earn income from regular employment.

Then How Much Is Enough?
Experts suggest that money invested in a moderately aggressive portfolio (with vehicles like an Standard And Poor's Electronic Traded Fund (ETF) and some small amount of cash equivalents), after accounting for inflation and taxes, allow for an annual payoff (withdrawals) of 4% of the amount you invested. With luck, you can bump it up to 5% or so, but I like to stay with the 4% number.

This means that if your current standard of living requires $40,000, you need a million dollars saved (40,000 / (0.04) = $1M) of today’s money.

What about personal enjoyment?
Some people think that a job exists to provide money for personal enjoyment. The reality is that a job first function is to provide money to buy necessities like food, shelter, clothing, and energy for heating and cooking. After that, we may have some extra money for enjoyment and other purposes, but having extra money for such purposes is not a right and should not be a de facto expectation.

I do understand that recreational activities help us keep our sanity. We have to include them into our lives and I do not promote saving at the expense of all recreational opportunities. I do like to ski, travel the world, cook with delicious (and sometimes expensive) ingredients, drive a sports car (10 years old, but that is a different story), and enjoy other luxuries. However, I have to recognize when I am saving “enough” and when I am just deciding not to save enough in order to give myself some luxuries I want.

What about rising my standard of living?
Consider that every time you raise your standard of living by ten dollars a month, that means you have to save about three thousand dollars to produce that increase when you can't or don't want to work. (Use the 4% rule) By all means, raise your standard of living, but only when you are sure that your increased savings will be able to eventually cover for that increase. What most people in America and in the World do is that they just rise their standard of living up to almost the top of their income, and then save just a small amount to feel like they are saving (in the best case – some people just don’t).

What about catastrophes?:
Catastrophes do occur. There are some of those that we can’t account for. Others we can, like fires, health problems, and long term care requirements. Most of us have to account for them by using insurance – otherwise, we would have had to save a hell of a lot more. Be sure you can insure yourself – that should be part of maintaining a healthy standard of living – working or not.

What Happens When I Have Saved Enough?
Then you are lucky. Save some more so you can increase your standard of living, if you want to.

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