January 15, 2025
Chris Weil
As is true in so much in life, the answer to the question posed is … it depends; in this case, it depends on what is meant by “enough.”
First, a disclaimer. According to a recent survey by Bank of America, 40% of Americans are living from paycheck to paycheck. For these folks the question of how much is enough is easily answered. “Enough” is a reliable income which pays all fixed and variable expenses, including taxes and retirement plan contributions, with a surplus left to build additional capital. We can talk about how much is enough capital as and when the conditions necessary to build enough income have been satisfied.
At WEIL, we are often asked the question “How much is enough?” It is usually asked in the context of a discussion with a client about what it takes to reach economic independence, whether or not such independence has already been achieved and, if achieved, how it can be sustained.
A simple answer to this question is: you have enough when your net worth, properly invested, generates income that, combined with other reliable sources, provides a spendable cash flow comfortably exceeding your expenses—including taxes—and allows for a reserve to protect against inflation and periodic market fluctuations.
This “simple” answer, while accurate as far as it goes, is not really so simple (nor does it go far enough). Suppose, for example, a retired couple has a net worth of $5 million consisting of a home ($1.5 million), cash $200,000, stock portfolio $2.5 million (of which $1 million is in a concentrated position - one stock they bought thirty years ago for $50,000), and 401(k) plan $800,000. Their annual income from all sources: interest on cash $8,000; dividends $60,000; 401(k) $25,000 (the current year Required Minimum Distribution, rising annually); and Social Security $35,000. Current annual total: $128,000. Sounds like a good number but does it meet the “simple answer” test from paragraph 4? I have deliberately created an example, all too prevalent in the real world, where it does not.
Our couple has “claims” on their annual income in excess of $128,000 as follows: debt service on $400,000 home loan $28,000; property taxes $10,000; federal and state income taxes $35,000; support for a special needs (adult) child $20,000; other fixed and variable expenses (food and drink, gifts, clothes, insurance, auto fuel and maintenance, travel, entertainment, etc.), which aggregate to $50,000. The result? Expenses in excess of income by $15,000. It is not too much of an exaggeration to describe this couple as living a version of paycheck to paycheck despite a $5 million net worth.
Some readers will note that I have also created an example in which it is screamingly obvious why our couple should have bitten the bullet and already sold its $1 million position, paid the taxes and reinvested the proceeds. The benefit of a large net worth is, among other things, that there are almost always opportunities to enhance existing cash flows. A gift of a dinner for two at the restaurant of their choice to the first person who tells me, via phone, email or text, how this could be done in the case of our couple. (Disclosure: my Compliance Officer requires me to cap that at $100 per person.)
Most people would, I think, agree that there is, in theory at least, some amount of wealth at which level the question of enough could be answered more or less definitively. And there is. But then again the theory often turns out to fail. Consider:
For most people, financial needs and wants (they go hand in hand) increase as we age, so it turns out that any earlier estimates become obsolete and so are periodically subject to (usually upward) revision. Why not assume this will be the case into the indefinite future with all the uncertainty this involves?
As a rule of thumb, everything costs more later than it did earlier. Why not assume this will be the case into the indefinite future with all the uncertainty this involves?
As we age stuff happens, stuff which cannot be anticipated and often comes with un-anticipated costs. Uninsured casualty losses, investment losses, financial support obligations, business failures, divorces, extended periods of unemployment, long-term care expenses, the list goes on. Why not assume this will be the case into the indefinite future with all the uncertainty this involves?
“Work,” said C. Northcote Parkinson, “expands to fill the time available for its completion.” This is the now famous Parkinson’s Law. Inspired by Parkinson, I offer another Law: wants and needs expand as capacity to fulfill them becomes increasingly feasible. And a corollary: with our needs and wants susceptible to inflation and unexpected costs, we tend to overcompensate and overestimate what constitutes "enough."
As a practical matter, there are plenty of real world examples of cases where we may need more than we have. The first and obvious one is when there is still a distance to go to achieve economic independence. But there are many others:
You are in a boom or bust type business and need to rely on accumulated assets independent of the business in the event of a bust and no recovery. If you include the estimated value of your business on your balance sheet, and without its value you would not be economically independent, you don’t have enough.
Your adult children may be doing okay financially but, as it turns out, there is no way they will be able to finance any significant portion of their children’s college education. There are eight grandchildren, all young. The grandparents (you) decide to provide for the grandchildren’s college costs. You are economically independent but haven’t any excess assets. If the average age of the grandchildren, say three, results in an average fifteen years until they reach eighteen, could it be the case that the average cost for college tuition, books, room, board and travel could be in the range of $50,000 per year? Count on it. At first blush, therefore, it looks like your comfortable net worth today is not enough to fund the desired college costs ($200,000 per grandchild for four years or $1.6 million). There are nuances in these calculations which I have avoided, but you get the point.
You are an owner of a business which is in periodic need of loan financing. Sometimes the loan cannot be repaid timely and banks, for whatever reason, can choose not to renew. You can be called upon, at any time, to become the banker of last resort, but a banker who runs the risk of having to wait for what could be a considerable period of time for repayment (a “considerable period of time” could be years), and this could be the case whether the business is struggling or booming. If struggling, all revenue must be used to support operations; if booming, all revenue must be used to support growth. And, yes, if the business is booming it should be conventionally bankable. But there will be times when your booming business coincides with periods of high interest rates and/or unattractive loan terms causing you to decide against using conventional banking facilities. It makes sense to conclude, particularly when faced with what could prove to be uncapped financial obligations, that you don’t have enough.
Assume the costs of an assisted living/memory care facility range from $5,000 to $10,000 per month (or more). The typical length of stay is two to three years. In-home health care can cost between $18,000 and $25,000 per month. Estimating end of life spending is crazy-making. There are too many moving parts and too many variables and too many circumstances unique to the individual(s) involved. But when contemplating what health-related costs may be for the last years of life, and taking into account that these costs are uncertain but significant, it is understandable why many people simply throw up their hands and, unless seriously wealthy, conclude that whatever they are worth isn’t enough.
According to AI Overview (which I assume is reliable) about 49% of the U.S. population gave some (unspecified) amount to charity in 2022. About 85% of affluent households did so. From my own unscientific survey of people I know who are philanthropically inclined, I estimate that of the affluent a good many (certainly more than 50%) would give more if they felt they could afford to do so. If I am anywhere near correct, this justifies in these people the sense that not only do they not have enough, they will never have enough. To anyone involved in philanthropy, the reason is obvious.
It comes down to a matter of a finite supply (of philanthropic money) and an infinite demand (for philanthropic money). I don’t mean by this that philanthropies “demand” money. I mean that in the case of most philanthropic enterprises, large and small, the demand (or need) for the services they provide exceeds, often by orders of magnitude, the resources available to address those needs. Indeed, the spread between supply and demand is often so great as to be unmeasurable.
You will note that the reasons why it may be hard for many people to be satisfied with the wealth they have, at least the ones described above, are clearly financial. “I don’t have enough, because even though I am financially comfortable now, I may have a need for significantly more resources in the future.” But there are at least two more reasons why some people are certain they don’t have enough, even if by any standard they do. These are reasons not based exclusively on financial motivations.
At the risk of practicing therapy without a license, I would describe one such reason as based on childhood experiences of deprivation. Perhaps poverty, perhaps losing a cherished home through foreclosure, perhaps losing a parent at an early age and having to quit school to support the family. There are a thousand possibilities but the outcomes are similar. A deep sense of insecurity in a world that can turn on you at any moment. The only defense? Enough wealth to protect against, or at least mitigate, the economic consequences of bad times, or bad luck, or bad decisions. And as it turns out, if no amount of wealth can “cure” the sense of insecurity, then no amount of wealth is enough.
And then we have the example of certain very wealthy people who continue to pursue wealth accumulation for reasons having nothing to do with economic security. In most of these cases, the motivation that drives the continuing accumulation process is the not so subtle morphing of accumulation for economic reasons into accumulation for purposes of power. This is not a new insight. Wealth has always been the handmaiden of power (and vice versa). And while it is true that a few very powerful people have lived modest, even ascetic lives, in this age many of the powerful (or would be powerful) view wealth as a necessary component for achieving, extending and holding power - which almost always means political power. So just as is the case with the “incurably insecure,” there is no such thing as “enough” for those who view great wealth as a pre-condition to achieving great power. For these folks there is no such thing as too much wealth, because there is no such thing as too much power.
Talking with clients about their economic security (which is another way of dealing with the question “how much is enough”) is one of the things you pay an advisory fee for. The Team at WEIL is ready when you are.
This communication may contain privileged and confidential information; people other than the addressee should not review, distribute or duplicate it without permission. Nothing in this communication constitutes a solicitation by us for the purchase or sale of any securities. We do not accept account orders or instructions by e-mail, and will not be responsible for carrying out e-mailed orders or instructions. We provide reports as an accommodation to help you monitor your investment activity; securities pricing may not reflect reliable values. In the event of a discrepancy, the information in your confirmations of daily activity and monthly statement of account shall govern. While the information in this communication comes from sources believed to be reliable as of today, we make no representation as to its accuracy and completeness and provide no assurances as to future returns or performance. We may own positions in securities mentioned in this communication. Investing involves risks, including the possible loss of the principal amount invested. There can be no assurance that recommended investments will be successful in meeting their objectives. Investment in mutual funds is also subject to market risk, investment style risk, investment adviser risk, market sector risk, equity securities risk, and portfolio turnover risks. More information about these risks and other risks can be found in the funds’ prospectus. The prospectus should be read carefully before investing. Nothing herein should be construed as legal or tax advice. You should consult an attorney or tax professional regarding your specific legal or tax situation. Christopher Weil & Company, Inc. may be contacted at 800.355.9345 or info@cweil.com. (Version January 2025)
Comments