I was a guest on the Mindful Fire podcast released today. So I thought it would be appropriate to talk about one question that kept coming back again and again on this podcast. Before we dig in a little about the podcast. Host of Mindful Fire Adam Coelho is a 10 year Google veteran and is passionate about financial independence and mindfulness. During our interview, he asked several times, how did I know I had enough when I decided to retire. So let’s dig into this age-old question How much is enough?
In our previous contentment discussion, we talked about how if you have food, clothing, shelter, and healthcare, you are luckier than 99.9% of the rest of the world. At times, it may not seem like that but think about it, how many people are struggling to put food on the table daily? What does that mean to be financially independent? If you are making more money than you did five or ten years ago, when do you believe you have reached a point where you have enough money without any worries for the future?
Wall Street has a formula for how much is enough. I am sure a lot of you know the classic 4% rule they have been preaching for the better part of four decades. It says that you should have 25 times your annual expenses tucked away in order to retire. Meaning, if you take a 4% annual withdrawal from your savings, based on average market returns will make sure that you outlast your money. Now, I have reservations about this formula because no two people are alike. If you own some rental real estate that is producing enough to cover your expenses, you may not need the 25 times your expenses. My point however is not about any formula. What I am here to argue is that it is a moving target. If you think about it, your expenses are much higher today than they were when you were just starting in the real world! As your income kept increasing, so did your lifestyle and expenses.
So let’s discuss how much is enough in the context of our expenses. We live in this consumption culture where everyone wants the next best thing that is being bombarded by advertisements and marketing experts. I remember, we used to use our mobile phones for three to four years on average. Now, these devices are being replaced annually or every two years at most. Does everyone need that iPhone 12? And it is just not about mobile phones. We used to live in a house for all our lives—that is where the 30-year mortgage was originated. Now people keep moving “up” every three to five years. our consumption culture is creating a lifestyle that has become so expensive that the majority of our households need two incomes to run a household. That has reduced family time and relaxation time for the entire society. We are the most tired nation on earth. Here is an interesting tidbit—people are so afraid to lose their jobs that they are checking emails on their vacation! So the first thing we need to do is reduce our consumption. That is good for us individually as well as the society as a whole—think about the resources we will save. Once we curtail our consumption, obviously it will reduce our “number” for financial independence no matter what formula we use.
Another point I would like to make is that most people think that financial independence is that destination. They will reach that someday and their life will change! It is never like that. One thing I have often advocated is to “leg in” to your financial independence. If you think you are halfway there, for example, try making some changes in your life and begin to do what you would want to do during retirement. You never know what you may and may not enjoy. So don’t wait till that someday, begin living your life today!
The last thing I would say is that figure out your purpose. Because there is only so much golf one can play. If you are fortunate enough to reach that financial independence, you may get bored or even depressed if you don’t have a plan for it. The best way to avoid that is to make sure that you have a purpose for which you are passionate. Whatever that may be for you but it is important to figure that out before you call it quits. I may have said this before but start volunteering for your favorite cause. Just a couple of hours per week. You would be amazed what giving back does to our mental health.