By Elizabeth Kerr
Every time someone tells me about someone they know who has had a great job earning a small fortune each year two things happen.
Predictably I say the customary “good for them”… but in my head I wonder – “why the hell are they still working then…. on that wicket they should have been able to retire ages ago”.
I suspect the answer may be that they really like their job, the idea of early retirement hasn’t entered their brain, a combination of the two, or more likely they haven’t yet cottoned onto what is “enough” for them.
So with that conversation in mind, today I’m looking to help you identify what “enough” means to you and discuss the biggest obstacle on the way to getting there.
How much money is “enough” money?
I know that YOU understand deep down inside that money alone does not make you happy.
But how much money do you think you would need to keep yourself away from being ‘unhappy’? The short answer is that no one really knows, and the long answer could be any of the below:
- USD $75,000 (approx $97,000 NZD). A team at Princeton University have discovered after analysing 450,000 responses to a Gallup survey that any additional income over $75k per year doesn’t tend to have any additional impact on ones happiness. So with that in mind you could rule a line at $97,000NZD and be done with it knowing you would be happy with that as your retirement income.
- From another angle the NZ Living Wage is set at $18.80 per hour which has been identified as the amount necessary to “survive and participate in society”. So with that in mind one could argue anything above that is more than “enough”.
- The NZ super scheme affords you just $288 if you’re married and $374 net if you’re single (living alone) per week. Is that amount “enough”?
- Some experts say you need 75-85% of your final pay to maintain your current standard of living. That seems too much to me. When I stopped working there was less petrol, cheaper groceries (due to time for food preparation), no pantyhose, no parking charges, no expensive suits and more free time for free exercise, packed lunches, cheaper leisure and cheaper travel due mostly to the absence of structure. In summary everything seems cheaper not by 25% but by closer to 50% just by using some elbow grease and being smart with my time. So no, I don’t think that calculation is entirely correct, but may be the closest indicator so far, and is very much dependent on your standard of living.
If you’ve been living a life at $250,000 per year, coming down to just $97,000 is probably going to cause you some pain as you adjust your lifestyle to fit that income, let alone $18.80 per hour or just $288 per week.
Why can’t highly paid and respected finance professionals all just agree and tell us what we need? The answer is they just can’t. No one can predict how long you are going to live for and secondly, no one knows for certain what the return on your investments is going to be.
The answer is...
To know if you have enough to retire, you just have to grow a pair and decide your number all by yourself. That’s it. That’s the holy grail of retirement planning right there. Just decide and then make your lifestyle fit. The especially great news is you can do that at any age – not just at 65.
To start with you could look at your list of non-negotiable expenses and work to get those covered by your money machine. Once you have done that you have a bit of freedom to decide how you go about affording life’s extras. There are only two options for this - either you a) work and spend what you earn, or b) keep investing into your money machine so it can produce a larger passive income.
Which option you take I think depends on how much you enjoy your job and what you would rather be doing (if anything) with your time.
Option A is great if you know that you won’t be giving up paid employment all together but instead are just making an employment shift, for example: taking a not-for-profit job, changing careers, maternity leave, re-training in another field or maybe just going part-time.
Option B is best if you are done with paid employment and don’t think you will ever want to make a buck with your time ever again. Think volunteering, taking an internship, perpetual study, travelling, parenthood or just dedicating yourself to the art of growing old with grace and humour.
The fly in your soup is…
The biggest problem you face while you’re deciding on your number is that the goal posts are continually moving due in most part to some very clever marketers trying to get you to part with your money in exchange for their products.
While you might be sitting here today thinking there is nothing that you really need anymore, they already know that and are in the throws of making sure they can convince you of otherwise. They play a long game so unless you are sharp they will eventually win you over.
One of the ways you can get on top of this is by smarting up to the concept of Hedonic Adaption.
“Hedonic what”? ...you say.
Hedonic adaption refers to the idea that everyone has a base level of happiness and will return to that base level given time, regardless of what has happened to them. I simply refer to it as ‘loose lust’ - you want it but it’s not going to change you in any fundamental way.
In the context of today’s column, Hedonic Adaption refers to the notion that nothing you buy will make you eternally happy because after a little time you will return right back to where you are at now. Advertisers work hard to convince us otherwise, to convince us that without their products our lives will be miserable.
Take the classic new car advertisements spamming our TVs at the moment emphasising how well rounded your life will become with that particular vehicle. One minute skiing, the next you’re carving it up in the city on your way home from closing a great business deal – hold on, swing by to pick up drop-dead-gorgeous girlfriend from groovy bar – wave to all your very fashionable friends - and drive up to the country via a picturesque windy road. Perfection isn’t it?
‘Oh no you really thought by buying that car your life would be like that….. ohhh hate to break it to you’. Hedonic Adaption means that after a few weeks of driving the car you’ve been lusting after, it will undoubtedly become “just a car” and feel just like your old one did. (Two hours in Auckland traffic at Easter weekend and you are well on your way back to your base level of happiness).
How does it relate to having “enough”?
People who build a money machine for themselves and retire early, understand how hedonic adaption plays a part in their lives and how to control it.
They are quite clear about what lifestyle design factors make them most happy and that half of the battle is in the brain before it ever is in reality.
They know that the dash of envy they may feel over their mate's new purchase does not inspire them to run out and buy one as well.
Those that don’t cotton on to it early will be forced to feel some discontentment and depression as they are forced to make sacrifices due to insufficient funds for their lifestyle.
SUMMARY
The responsibility for deciding what “enough” is rests on your own two shoulders and is illustrated in the way in which you design your lifestyle.
Those that do achieve a money machine are usually very clear about the difference between having enough money to afford what one needs, and being happy & content.
They know their number and that’s what they zone in on every time that they make a purchase, an investment or a saving.
And just a thought...
I bet there are a lot of people who built their money machines in Auckland property and who are sitting on “enough” right now.
Is it your turn to make a life change yet, or has Hedonic Adaption fiddled with your number again?
24 Comments
I think $30k p.a. per person (exc rent/mortgage) is plenty.
Elizabeth, do you agree with needing 25 times your annual expenditure as your retirement number? I know there is enough evidence of that working in US, but is that a decent aim if you are mostly investing within NZ/Oz?
The 4% rule is a good rule of thumb and will hold under all conditions other than starting your retirement as a large depression happens (1929, 1970). I find it better to have multiple options available. If you can hold enough cash/bonds to see you the depression then you will be fine. By this, I mean that during those depressed times, you do not touch your equity investments and live off the buffer. 5 years of expenses would be my recommendation. Once you have burnt through this then you start on your equity which should have recovered some in the 5 years.
The other things to do are to ensure you have flexibility in earning and spending. The ability to make only a little money might be a big difference. This could be a hobby that expands into paid work when required. From the expenses side, you need to be able to live on less should you need to.
1/ No pantyhose!!!
Whhhaaaatttt???
2/ Don't ask a respected finance professional anything like "what money will I need...." they have a conflict of interest right there!
3/ I think $36 grand per annum after tax should be enough for a couple who own their own house. (With a bit kept in reserve for emergencies).
Of course that depends on how much you need to live. Broadly speaking 4% of $4mil would be $40k per year in cash flow before tax. Of course this is where diversification can play a part - It takes a long time to save $1mil but what things could possibly grow to equal $1mil by the time you need it?
I think interest.co.nz had a great article about super saying that by 65 the governments hands over to married couples a $600k annuity....(your super-fund) , remember a fully paid off house will cost you probably $10k a year over its life to keep it spick and span to pay some council to collect other peoples trash...so super is a good start and probably more than most people will save in cash when they get to 65, although Kiwisaver should help, lastly when i retire i know the age will be closer to 70 for super...
The key here is not to wait until you retire to live on less. If you can cut out any spending that does not give you real happiness or is not aligned to your long-term goals then you get a double win - the amount you can save increases and the capital you need to generate you retirement income is less. This means you can either retire earlier or retire with more.
When you're recently out of work you can do well enough with less because you can coast for a while. You already have clothes, probably not too much debt or vehicle expenses, you already have a bed and roof over your head, and food in the cupboard. These things catch up with you and the debt tends to compound.
the Super rate tends to assume that you have cheap accomodation already paid for, so you're not paying a large mortgage or rent. It also assumes you won't be taking long holidays or paying for parties (ie large social outings)
Another reason for staying the hot seat, is because of career momentum. People with "enough" income (as defined by others) tend to be specialised and have spent many years getting to their position. They're not likely to surrender it now that things are finally working for them instead of constant struggle up the drain pipe.
The word retire comes from the French language and means to go into seclusion......the dictionary provides the meaning as the period between employment and death..........retirement is uninspiring and should be avoided at all cost !!!!
People know that advertising is all about making them spend....... if you stop the transfer from pocket A to pocket B and make sure everything leaving pocket A can return to pocket A then you have found the sweet spot.......the easiest way to stop unhelpful spending is to pretend you have a whinging kid living in your wallet, every time you go to spend, it goes waaaa, whaaaa.....whaaaaaaaaaaaa then has a tantrum......give into it and don't spend!!!
The best adverts don't actually sell you a product they give you a reason to buy it...i.e. it solves this or that problem etc........ they create a feeling of I must have one......the I must have one should sound like a fire alarm......get out of the building time......the adverts also tell when to buy like NOW!!! but hey you've taken my advice and left the building on the evacuation alarm.
Just remember ...The smarter better educated economy that Pollies talk about.......it's all in the advertising too......
Sufficient passive income has to be an individual choice and not some average goal to fulfill.
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