How much is enough?

‘How much is enough?’ is something we ask ourselves in relation to lots of things – how much money do we need? How much free time? How much should we eat or drink? These are the sorts of questions I ponder a lot, so it was with great excitement that I encountered Arun Abey and Andrew Ford’s book How Much is Enough.

One of the first reflection questions in the book is ‘How much money is enough? Why? And how do you know?’

This is a question I could not have answered when I first started reading the book over five years ago, but now is one I feel I can do some justice to – ironically, thanks to yet another book.

So how much is enough?

How Much is Enough says ‘Once work stops, the kids eventually leave home, and expenses fall, most people find that they need around 75 per cent of their final working income to sustain a good lifestyle in retirement.’

This is the standard advice that is normally given, without any explanation as to why one would require 75% of one’s pre-retirement income when one no longer has children or mortgage expenses, or even commuting, work clothes etc. to pay for – nor any retirement savings to be making! It is pretty clear from here onwards that How Much is Enough is aimed at a middle-class (earning $50-$150k), middle-aged, married with children, nearing retirement (at somewhere around the 50-70 years of age mark) couple.

Most of the materials I have been reading for my Diploma of Financial Planning have also suggested spending 75% of pre-retirement income in retirement is pretty typical, although as low as 50% has also been mentioned.

This kind of advice has always baffled me – similar to the articles that tell us the ‘cost’ of raising kids differs depending on whether you are a higher or lower income family. One such article reads ‘the cost of raising two kids in Australia for a family on a middle income will set you back $812,000. For a higher income family, the cost rises to $1.09 million from the time the kids are born to when they leave home, while a lower income family can get away with spending $474,000.’ What rubbish. If a lower income family can ‘get away with’ spending $474,000, so can the middle and higher income families. There is no law which says you have to send your children to private school, enroll them in expensive extra-curricular activities, take them on pricey vacations, throw them lavish birthday parties or buy them designer clothes and expensive toys simply because your are in a particular income bracket.

Frequently, there is an enormous distinction between how much we need to spend in order to satisfy our requirements, which to me is the definition of ‘enough’, and how much we actually do spend. The amount that all people need in retirement, or need as children, is roughly the same (allowing for differences depending on health needs and rural/urban differences). As Kirkpatrick, in his free ebook Can I Retire Yet? Points out, ‘ Despite the oft-repeated advice that you will spend some standard percent (perhaps 60% on the low end to 100% or more on the high end) of your pre-retirement income in retirement, what it costs you to live is generally not a function of how much you make! There are millionaires who live like college students, and minimum-wage workers who live like millionaires — for a while — on credit’ (emphasis added).

Ultimately, studies which tell us how much people do spend are useless for telling us how much we should spend.

The average American consumes 2,534 calories (10,606 kj) per day. But health professionals recommend that the typical adult should eat around 8,700 kj (depending on age, sex, level of activity etc.). 

So, should you do what apparently most people do and overconsume? Or, should you give your body what it needs?

Let’s explore that typical advice a little further:

The 75% answer:

The average Australian household income is $66,820.

The average Australian family has 2.6 children.

The average cost to raise a child is reported as being between $163,440 and $190,634. This divided by 18 years and times by 2.6 children is between $23,608 and $27,536 per year.

The average Australian mortgage is around $450,000, and over $500,000 in some states. At current interest rates, a loan the size of the smaller of these two figures would have minimum annual payments of around $28,922.

Using the lower figure for children, this means that the average couple with kids and a mortgage is essentially living off $14,290 a year themselves (which happens to be broadly in line with what we, as a childless and mortgageless couple do).

Using the same figures for a larger income earner, say, $150,000, and the higher cost for kids and home, the couple would be living off of $90,328 per year.

In either case, once the expenses of mortgage and kids are gone, the couple will be considerably better off. But the $14,290 which the average couple has been living off of (their portion of bills, food etc) is not 75% of their income – it’s just 21%. The mortgage took up 43% of this couple’s income, and their children 35%. The same is true even of the higher income couple who have a lot of disposable cash – $90,328 is 60% of their income, not 75% – and it is quite likely that a smart couple would be directing a good portion of this income to savings/investment/super and actually living off of a lot less. Why, barring significant health issues, one would need to jump from living off of 60% – or even 21% of one’s income – to 75% is beyond me. Even accounting for additional travel etc. I don’t see that this is ‘necessary’ – but I guess it all depends on what you deem ‘enough’.

If you want to play around with this figure, try the How Much is Enough retirement calculator.

Obviously, using ‘average’ figures isn’t going to tell everyone’s story, and I’d be highly surprised if it matches your situation – I know it doesn’t match mine (we don’t have kids, for example). But I also know that our living expenses decreased significantly once we’d paid off our mortgage. In fact, recent findings suggest 35% of Australians have experienced ‘mortgage stress’ – and such figures aren’t new. In 2011, around 25% of homeowners were experiencing mortgage stress, defined as spending more than 30% of your pre-tax income on mortgage payments. So for many people, the elimination of a mortgage alone should be enough to lower their expenses by more than 25%.

The Other Answer:

Your Money or Your Life also has a chapter titled ‘How Much is Enough’, in which the reader is encouraged to track every cent flowing in and out.
We did this solidly for a year, and at the end of every month, added up all the categories (bills, charity, events, eating out, entertainment, groceries, health/hygiene, household items, non-work clothes, non-work transport and work expenses, were ours) and asked the following questions which Dominguez and Robin recommend:

  1. Did I receive fulfillment, satisfaction and value in proportion to life energy spent?
    After subtracting all of our work-related expenses, and after dividing pay received by the actual number of hours worked, we realised that, on average, we earned $7.82 per hour. So everything we spent was converted to life energy, and then evaluated purely on that basis.
  2. Is this expenditure of life energy in alignment with my values and life purpose?
    Thinking about how we spent not our money but our life energy at month’s end really helped us to evaluate which expenses we might trim. Some things, when you see how much of your time they took to earn, really aren’t worth it.
  3. How might this expenditure change if I didn’t have to work for a living?

Finally, having a separate category for work-related expenses such as bus/train tickets, stationery, conference expenses, work clothes, business lunches etc. helped us to see what we were spending simply as a function of our jobs. Eliminating these expenses in our post-work  (financial independence or ‘FI’) model, and subtracting all of the expenses that do not bring fulfilment (which includes things like greasy takeaways because you’re too tired from working to cook!) helps to show you what your true expenses are.
This carefully calculated, evidence-based, personally-tailored figure is your ‘enough’ – not some average percentage based on other people’s spending patterns. It takes longer to figure out than a rough percentage, but it is much more useful.

13EnoughDownload your own ‘how much is enough?’ spreadsheet.
How much is enough to you?

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