What this article covers
Opher Ganel argues that many successful professionals never decide when enough money is enough, and defines his own number as the point where he can live on what he has accumulated, however long retirement lasts, without touching principal. He then turns that idea into a dollar figure in four steps (retirement budget, minus income from outside your portfolio, plus taxes, times 25), reaching $1,225,000 in a worked example based on a $75,000 income.
Key Takeaways
Your “enough” point is when you can live on your savings without eating into principal
Opher Ganel defines enough money as the amount that lets you live on what you’ve accumulated, no matter how long retirement lasts, without drawing down principal. He notes that beyond that point, each additional dollar makes no appreciable difference in what you should care about, yet many high earners keep working far more than is healthy.
You can calculate how much money is enough in four steps
Estimate your retirement budget (current net income minus what you save), subtract income from outside your portfolio such as Social Security, pensions and rentals, add back an estimate for taxes, then multiply by 25. In the article’s example, a $60,000 budget minus $26,000 of outside income plus $15,000 of estimated taxes leaves $49,000 a year for the portfolio to cover, or a $1,225,000 target.
Advisors suggest saving 25 to 30 times your annual retirement spending
David Edmisten, CFP, of Next Phase Financial Planning cites a rule of thumb of 25 to 30 times annual spending, less guaranteed income, so $60,000 a year of spending implies $1.5 million to $1.8 million. If you’re short, he suggests lowering required monthly spending, including paying off debts and possibly your mortgage, since the less you need each month, the less you need saved.
What is enough money? Do I have enough? Many people, including financially successful people, want to know when enough money is enough.
Why Do Successful People Struggle to Know When Enough Money Is Enough?
The main problem with capitalism, as practiced in the US, is that it doesn’t do a great job of taking care of the poor. Our social safety nets aren’t up sufficient to take care of people who suffer mental health issues, lack education, are indebted by catastrophic health expenses, or are simply denied real opportunities. Curiously, another problem hits people on the higher end of financial success — not knowing when enough money is enough.
If you’re a successful professional (or on your way to becoming one), you’re probably working far more than is healthy for you. You may not be taking the time to be with your family, taking vacations and recharging, working out, or simply taking some well-deserved downtime.
This raises the question — how do you know when you have enough money? You can always aspire to make more. If you’re like most of us, you can struggle to make your first million (it’s mathematically easy to prove that’s the hardest one, by the way). If you’ve reached that milestone, you can work on your second, third, fourth, tenth, or hundredth million. At some point, making that next buck makes no appreciable difference in anything you (should) care about.
What Does Having Enough Money Mean? Living on Savings Without Touching Principal
After thinking about it for a while, here’s how I define when enough money will be enough for me: it’ll be when I can live on what I’ve accumulated, no matter how long my retirement is, without eating into the principal. This is what’s also known as the FIRE point, for Financial Freedom, Retire Early (though in any particular person’s case, it may not be all that early).
Why I want to leave all that money when I die is the subject of a different discussion, but for now, let’s take it as a given.
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How to Calculate How Much Money Is Enough for You, in Dollars
Here’s my simple, step-by-step guide on calculating the above point in actual dollars:
Step 1: Estimate Your Total Annual Retirement Budget
Even if you know what you spend these days, figuring out accurately how that will change over the years and decades until you retire is not simple. Some spending categories, such as travel, entertainment, and gifts, will go up. Others, such as contributing to grandkids’ college funds, will get added. Yet others, such as gas and car maintenance, will likely decrease.
Finally, some, such as mortgage payments, may disappear altogether (assuming you pay off the mortgage by then). With so many unknowns, the simplest way to estimate your retirement budget is to take 100% of your current net income and subtract what you set aside for savings. For example, if your income is $75,000 and you invest 20% of that or $15,000 (way to go!), your guesstimated total retirement budget would be $60,000. “The amount some needs to have saved to enjoy a comfortable retirement can vary greatly, depending on the lifestyle the retiree wants to live and the costs of their regular spending,” said David Edmisten, CFP and Founder of Next Phase Financial Planning.
A good rule of thumb is to aim to have saved 25-30 times the amount you’ll spend each year, less any guaranteed income sources. So, for example, if you plan to spend $60K a year in retirement, you’ll want to have saved $1.5 million to $1.8 million before you retire.
Step 2: Subtract Retirement Income From Outside Your Portfolio
The more income you get in retirement that doesn’t come from your portfolio, the less you need to set aside. Some examples include annuities, pensions, Social Security, rent from properties, royalties, etc.
Let’s say you don’t have any annuities, pensions, or royalties. Let’s further say you have a rental property that you expect will bring in a net positive cash flow of $6000 each year and that you expect to get $25,000 from Social Security. I’d reduce that last by 20% since that’s the size cut needed by 2035 if Congress doesn’t do anything, so make Social Security $20,000.
Subtract the $6000 net rental cashflow from the $60,000 example we got at the end of Step 1 and $20,000 reduced Social Security benefit, and we reach $34,000.
Step 3: Add Back Enough to Cover Taxes in Retirement
Essentially, you need to estimate what your pre-tax total income needs to be, given that it will likely come from dividends, selling some bonds and/or shares of stocks, and Social Security benefits, to cover your budget with a bit of margin.
The exact amount will depend on where you live in retirement and your personal mix of income sources in retirement. For our example, let’s assume your overall tax burden will be 20% to get you to the $60,000 you’ll need. Divide the $60,000 by 0.8 and subtract out that $60,000 ($60,000/0.8 – $60,000 = $15,000), and you get an estimated total tax burden of $15,000. Add this to the $34,000 from Step 2, for a total pre-tax $49,000 that will need to be covered by your portfolio.
Step 4: Multiply by 25 Using the 4% Rule
Using the well-known 4% rule, you need to divide the $49,000 by 0.04 (or multiply it by 25), and you’ll get $1,225,000. If the above numbers and assumptions were all true and accurate for you, once your portfolio hits $1,225,000, that should be your personal “enough” point.
Then, all you need to do is set aside and invest enough each year to get to that point (I said it’s simple, not easy). Oh, and I’d also suggest you create a backup plan for making a bit of money in retirement just in case your investments underperform to the point that they don’t make 4% above inflation.
Needless to say, working as an employee makes the above difficult, requiring life-long discipline, hard work, and frugality. Becoming successfully self-employed makes it far easier (though still not quite easy).
What’s your definition of your “enough” point? Have you set out your strategy to reach it?
“If you’re ready to retire, but are not sure you’ve saved enough, there are a few steps to consider to help you get ready,” said Edminsten. “First, look to do what you can to reduce your required monthly spending. This can include paying off debts, and even considering paying off your home mortgage if you have one. Look at all areas of your normal spending and see what you can eliminate or reduce. The less money you need to live each month, the less savings you’ll need.”
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Frequently Asked Questions
How do I know when I have enough money?
Opher Ganel’s test is whether you can live on what you’ve accumulated, however long your retirement lasts, without eating into the principal. Beyond that point, he argues, making more money makes no appreciable difference in anything you should care about.
How do I calculate how much money I need to retire?
The article’s four steps are: estimate your annual retirement budget, subtract expected income from outside your portfolio (Social Security, pensions, annuities, rental income, royalties), add back enough to cover taxes, and multiply the result by 25. In the worked example, that produces a target of $1,225,000.
How do I estimate my retirement budget?
Because so many spending categories will change by retirement, the article suggests a simple shortcut: take 100% of your current net income and subtract what you set aside for savings. Someone earning $75,000 who invests $15,000 a year would estimate a $60,000 retirement budget.
Why multiply by 25 to find your retirement number?
Multiplying by 25 is the same as dividing by 0.04, which applies the well-known 4% rule. The author also suggests having a backup plan to earn some money in retirement in case investments underperform.
What can I do if I want to retire but haven’t saved enough?
One advisor interviewed recommends reducing your required monthly spending: pay off debts, consider paying off your mortgage, and look for spending you can eliminate or reduce. The less money you need to live on each month, the less savings you’ll need.
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Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.
About the author
Contributing Writer, Wealthtender
My career has taken some unexpected turns, from earning a PhD in experimental high-energy physics, to conducting cosmic-ray research in Antarctica, to supporting NASA projects and programs, to running my own consulting business. I also run several other small businesses and help my wife run her Marriage and Family Therapy practice.
Those experiences taught me to question assumptions, think critically, and recognize that real-world decisions of any significance rarely have simple answers that apply to everyone. Today, I bring that perspective to writing about personal finance. Drawing on my analytical background, business experience, and research, I explore financial decisions, challenge conventional wisdom, and help readers understand the tradeoffs that can affect their financial well-being. To complement my own research and experience, I also weave insights from financial professionals into my articles, drawing on their expertise and real-world experience helping clients navigate financial decisions and challenges.
At medium.com/@opher-ganel, you can read more of my articles and subscribe to receive email notifications when new ones come out.