5. How Much Is Enough?

True story, Word of Honor:
Joseph Heller, an important and funny writer
now dead,
and I were at a party given by a billionaire
on Shelter Island.
I said, "Joe, how does it make you feel
to know that our host only yesterday 
may have made more money
than your novel 'Catch-22'
has earned in its entire history?"
And Joe said, "I've got something he can never have."
And I said, "What on earth could that be, Joe?"
And Joe said, "The knowledge that I've got enough."
Not bad! Rest in peace!"


--Kurt Vonnegut

John Bogle opens his 2009 book, Enough: True Measures of Money, Business and Life, with this story - published a poem in The New Yorker (May, 2005.) The book is a fun read, and although it covers a lot of the same areas as previous books (in particular Common Sense Investing), it's more personal this time.

The book also made me wonder how much is enough for me. My sister, who lives in Goa with her daughter, is happily retired with savings that allow her to spend about $10-15K a year. For myself, I'm budgeting $90K a year for retirement. Do I really need it? I know of people who plan to retire once they can guarantee an annual income of $150K. Are they crazy or am I not saving enough? What is enough and what is excessive?

Many factors go into my retirement planning, and the unknowns are greater than the knowns. To figure out my expected expenses, I started out with my 2010 spendings. It was easy to sum them all up from my bank account online statements (and using some nifty Excel tricks.) I removed all the deposits, of course, as well as expenses I don't expect to have in retirement (such as mortgage and toll payments.) The final number was surprisingly small: about $42,200. How did it balloon to more than double this number?

• Medical expenses: today I'm insured through my employer. Although Massachusetts (and soon, the rest of the US) enjoys universal insurance benefits, the minimal cost is still about $500 a month. Assuming I want the best coverage and allowing for emergencies and out of pocket expenses, I budgeted $1000 a month, or $12,000 annually.
• Travel: when I'm retired, I want to travel a lot. Add $10,000.
• Computer, cellphone (currently covered by my workplace): $1000 annually
• Car: I finished paying for my car, but I should assume $500 monthly for car payments and another $2000 for insurance (currently deducted from my paychecks): add $8,000 annually
• Property tax (currently paid through the mortgage company): $2,000 annually

The total came up to $75,200. I also assume an average tax level of 20% at retirement (including capital gain taxes, income taxes and state taxes). Taking this into account, I'll need to withdraw about $94,000 annually! Suddenly, much more than my earlier modest $42,200 calculation. 

This was surprising - I didn't expect it to be that high. More conservative assumptions can push it even higher: higher taxes, expensive hobbies, kids (if I decide to have them), unexpected emergencies. 

On the other side, I'm also not taking into account other sources of income, mainly Social Security and sharing expenses with my partner. For the former, with all the talks about Social Security eventual insolvency, I don't want to see it as more than a bonus payment of about $20,000 annually in 20-25 years. This is not going to make a big dent in my income in any case. I do have a partner that shares the expenses, but when it comes to my finances, I want to be independent. 

And then there's the question of inheritance. Here's the yuck factor means that I'm not going to assume anything, because taking it into account is too painful. 

This calculation cannot be made completely accurate. For example, when I'm 85, perhaps I won't travel as much and my hobbies/travel expenses will be lower. On the other hand, my medical expenses might be higher. I decided not to start nit-picking at each expense and assume that on average the total annual budget will remain the same. 

My bottom line is therefore $94,000 pre-tax. 

Running this number through the Safe Withdrawal Rate calculator resulted in my retirement goal: about $3.2M for my age, time horizon and my growth/inflation assumptions. Of course, I'm not there now, but it's fun to make the calculation and try to predict when I'll have enough. 

For me, "enough" is now well defined. RIP, Joseph Heller!