How Much is Enough?
As I see it, for investors and advisors, there is one question above most if not all others: How much is enough?
It’s a loaded question. How it’s answered can tell you a lot about a person’s ethics or philosophical outlook. For present purposes I will focus, instead, on what’s practical.
For instance, if you don’t know how much retirement income is enough then you don’t know how much risk you need to take in your investment portfolio. If you don’t know how much an extended long term care event might cost, then you can’t know much LTC risk to transfer to an insurance company. You don’t know which kinds of risk should be transferred and which kinds to retain and self-fund.
No answer is worse, for risk management and financial planning, than “I don’t know.” Too often a more truthful answer left unsaid is “I don’t want to know.”
Nobody has ever told me, “I want to be either rich or impoverished! None of this in-between stuff for me.” So, among answers to How-Much-Is-Enough, we can rule out the answers on the extremes, such as “As-Much-As-Possible,” and “Nothing. I-Want-To-Retire-In-Abject-Poverty.”
Unless you are at or near the end of your life you can answer this question. Your answer is not set in stone. It changes as your life changes. It changes if your household goes from one income stream to two, or three, or back to one, or even none. It changes with a cathartic moment that changes the way you see the world and your place in it. It’s not just a toss-off to say that “money changes everything,” even if it only increases your resolve not to let it run your life.
Answering the question How-Much-Is-Enough is especially important if you are among those who don’t want money or money worries to run or ruin your life. You must answer the question to get money under control instead of letting it control you.
So, when your advisor, or some do-it-yourself financial website, asks you to fill out a questionnaire in any way related to the question How-Much-Is-Enough, just do it. Guesstimates are ok to get started. If you’re starting from zero, then guesstimates are your only option. So, fill out that questionnaire! You’ll find it helpful to have at least some vague notion of how much is enough when you are filling out the questionnaire(s).
The questionnaire is a drill. The answers on the questionnaire(s) provide crucial guidance when answering questions that come up when you’ve drilled down to the next level.
For example:
If I retire at age 65:
1) How much/what percentage of my anticipated pre-retirement income will I need in retirement?
2) Given the answer to #1, how much do I need to save each month starting now?
3) What average-annual-total-rate-of-return do I need to earn on my retirement savings between now and when I retire?
4) How much risk must I take to earn the rate of return referred to in #3?
5) If I have a child (or children) but die before they are grown up, how much life insurance would be enough to be sure they’re ok financially?
6) What if I retire early, for instance at age 60?
7) What if I plan to work until age 70 or later?
8) How am I going to pay for long term care?
9) How am I going to manage long term care for someone I love?
10) What is my financial responsibility to those who are financially dependent upon me?
If I’ve left you with a questionnaire that you haven’t gotten around to filling out at any time in the last several years, please just fill it out and send it to me!
Enough already!
Bill Stant
1614 Upper Schooner Road
P.O. Box 1700
Nashville, IN 47448
Tags: