Hey everyone, it’s Finance Fridays again. Last week we talked about “different numbers” for “different Walters”. Today I want to discuss “How Much is Too Much?”

Stock Photo from: Pixabay

How Much is Too Much?

This question is mostly centered around retirement. As you know, my “number” currently would be considered especially high by some. For example, the friend of mine who needed $4 million, clarified to me that he only needed $4 million in all assets, which I guess it considered post-tax. However, when I considered my number, I didn’t consider assets such as my house or things like that. In that sense, his number is significantly more specific than mine.

Either way, his number is still significantly lower than mine. His idea is that as long as he could achieve reasonable returns on his investments he could live off of them relatively easily with some help to come from his 401k and Social Security at some point.

He’s not wrong.

He and I tend to disagree on our “numbers” but in terms of lifestyle we’re both pretty similar in how we live. So why is there such a big discrepancy in the numbers? Well, the two major possibilities is that I am overly conservative or he is overly aggressive. However, the reality is that it’s probably a combination of both. I also want to clarify that he and I both live on Hawaii, so no need to account for differences in cost of living. Of course, for any of my readers, your numbers will be significantly skewed by where you live or plan to retire to.

Like I’ve said before, my major concern when it comes to retirement is the possibility of the money running out early. As a physician (and radiologist), my skillset is very much a use it or lose it expertise. It would be exceedingly difficult to come back and start reading studies again after having retired for 3-5 years. It would be downright impossible to come back after 5 years of retirement. For that reason, I am very conservative when it comes to “my number”. It would be a nightmare to me to be forced out of an my “early retirement” because I ran out of money. The likelihood is that I wouldn’t be able to find a job as a radiologist given my absence and I have zero other skills. Mainly for this reason, I err on the side of caution. 

What about him?

Well, his general mindset when it comes to retirement is very much the same as mine. However, his list of liabilities is smaller than mine. He (and his wife) have been able to pay off their student loans. Their mortgage is very reasonable and their jobs are stable. In other words, he has their finances very much under control. Additionally, he’s had their finances under control for longer than me. This may be simply a difference of perspective because of a difference of experience. In 3-4 years when I “catch up” to him, perhaps I will lower my number a bit a well. However, I think that in general I am still more conservative than him. Even if I was to receive a windfall of money that would enable retirement, I would probably still work for 2-3 more years. This would enable to me to make sure my other investments were stable before leaving medicine for good.

Wait.. what’s the buffet picture for?

It’s to illustrate the “How Much is Too Much” theme of this post. When you go to a buffet, the immediate expectation is to “eat your fill” or “get your money’s worth”. However, this is technically a fallacy. When you go to a buffet, you pay a certain amount of money, let’s say $20. That’s a sunk cost. No matter what you do or how much you eat, it will still be $20 (of your money).

So in this way, people try to place values on things at buffets to “get their money’s worth”. For example, let’s say I ate 4 plates of food which I estimate to be worth $5 a plate and I also drank 3 sodas which I estimate to be worth $2 a soda. So my dining experience is worth $26. I rationalize spending $20 for the buffet by eating what I think is $26 worth of food. On the other hand, let’s say I only ate 2 plates of food and drank 1 soda. This would mean I only ate $12 worth — meaning my $8 of my $20 was “wasted”.

Is that true?

No.

The truth of the matter is, $20 is $20. There is no real “eating your money’s worth”.

This same kind of thinking can be applied to retirement, kind of. You need a certain amount of money to retire comfortably, so you try to save toward that goal. You believe that if you oversave and aren’t able to use that money, that you didn’t get your money’s worth. However, that isn’t necessarily true. The difference is that you are buffering yourself from running out of money.

In an ideal world, you would know exactly how much money you need to retire, save that amount and be able to retire with absolute confidence. However, we don’t live in an ideal world, there are multiple variables in play. You don’t know what kind of returns you could expect over short periods of time. Other unforeseen problems may arise. You don’t know how long you will live, or how long your spouse will live. How bad will inflation be? How much will healthcare costs be by then? There are variables upon variables.

If you’re an optimist than you plan accordingly. However, when it comes to finances and money matters I always try to conceive of the worst case scenario, meaning I’m a pessimist (financially). This also explains why I am so conservative.

That said, “How Much is Too Much?”

That’s an answer you’ll need to figure out yourself I think.

For me I don’t think there is a “too much” necessarily. It would require me to sit down and do a lot of math before I said “oh, there’s too much”.  The way I think about it is that it’s pretty easy to donate it to charity or do some good with any extra money — so it will never be “wasted”. However, I think finding extra money in retirement to make ends meet is significantly more difficult. The other possibility that we must consider is that while we may be somewhat frugal now, in retirement we may end up spending more money. Think about how much money you spend on vacations for a week or so, and then extrapolate that 1 week vacation to the 52 weeks in a year. Costs will add up. Of course, the opposite may be true. Maybe when you retire you will be content to do cheap or free things, like hang out at the beach all day or go hiking. Only you know you.

For my wife and I, I think we’d be pretty content hanging out wherever our kids end up for the most part. Then I’d imagine maybe 2-3 trips a year to travel to different places, but probably nothing extravagant or even all that long. Overall, I’m pretty sure my wife would want to be around her grandkids as much as possible anyways.

As for me specifically, I don’t think I require too much. Give me easy access to good food and my computer and that’s all I really need to be honest. A beach would be nice too. Having my friends stop by and drink some whiskey with me would be pretty great as well.

I guess that’s the other finance exercise we should all do.

If you retired today… what would you? More so than that, what would you do for the year? What would be the upper end of expenditures for you in retirement? What about the lower end?

Deep thoughts, Jack Handey.

TL;DR

The idea of “Too much” (in retirement) likely depends on your mindset.

Am I too conservative or is my friend too aggressive?

$20 is still $20 — no matter what you ate.

New finance exercise for today:

• If you retired today… what would you?
• More so than that, what would you do for the year? 
• What would be the upper end of expenditures for you in retirement?
• What about the lower end?

-Sensei

Agree? Disagree? Questions, Comments and Suggestions are welcome.

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