Retirement: How Much is Too Much?

So often, we see articles written asking if a person can retire on $1 Million or “how much do I need to retire”? Perhaps the equally important question is when do I have enough or too much? The concept of too much may seem a little foreign, you are not likely to hear that phrase from your financial professional, where the mantra is the more the merrier. There may be some merit to that, as life tends to throw us curve balls, but there is also the inherent conflict of having you amass wealth, so your advisor has more money to manage. We will make every effort to balance out this important question below.

First off, so much of this depends on lifestyle and the choices you make along the path of accumulation. If you live in Manhattan, it’s more than likely that $1 Million won’t cut it, given how expensive nearly everything is in the Big Apple. I surmise that a sizable portion of anyone's monthly expenses would be spent on dining out at all the fabulous spots that pop up, seemingly weekly!  On the other hand, if you live in a remote area in the mountains of Vermont, you may be very comfortable on $1 Million, if you’re not too close to a ski resort that is. Recall that when you started on your path to saving for retirement it was about having the right amount when it was time to wind down your career, but over time the savings itself often becomes the goal which can lead to some unhealthy habits or relationships with our money. Does anyone work in sales?  If so, no doubt you are familiar with the concept of moving goal posts, but that is not unique to that profession. Part of what makes our culture (and markets) so successful is the constant drive to achieve more but there can and should be limits. As a thought exercise over the years, we have asked our clients how much they needed to feel comfortable (I draw a distinction here between what they feel they need and actually need) and inevitably the response was a figure greater than what they had presently. Now when we circled back 3-5 years later, when that aspirational target had been met or in many instances exceeded, we hoped there would be a degree of satisfaction or contentment. Alas, no such luck, it seemed in nearly every instance there was a new number greater than where they were today. If you think about this, much like Sisyphus whose unending quest to roll the rock up the hill only to see if come crashing down time and again, this can mean unnecessary stress or sacrifices or working too long (yes there is such a thing, my wife keeps insisting)

With any project or journey, it’s important to define the objectives. In finance, the goals differ from one person to the next. For many it’s about enjoying the “golden years”, buying that second home where the family will congregate, or others may feel it’s important to leave a larger financial legacy to loved ones or charities. Often, it’s some combination of all of those things.  Having been in this business for nearly 25 years it’s clear that even some of the “smartest” or “wealthiest”, have a poor understanding of the true power of their wealth and the comfort level to spend it. Here are a few foundational pieces that you need to have in place to start to build confidence, these are not for those just getting started but for anyone at any time along the journey.

Budget: What you don’t know, can hurt you. For an exercise that should not take more than a couple of hours when done thoughtfully, there is a real hesitation on the part of many savers as if knowing what you spend may make you feel a sense of guilt or fear. This should be more liberating than anything else. Cataloging what you are spending on a monthly or annual basis is a great first step. It’s unfair to you or your advisor to not have this information readily available, if you were a business and didn’t know how much went out the door each month, you would have a hard time finding any investors. 

Emergency fund: Fortunately, with cash now offering a mid-single digit return, this safe money will actually offer you something beyond simple peace of mind. While rates may rise and fall, having a healthy reserve can allow you to weather any financial storm from job loss to maternal leave or a home repair project. Emergency funds are there to cover unexpected expenses with ready cash. The industry standards suggest anywhere from 3-6 months of expenses be set aside, but you may have a different figure in mind that allows you to sleep well at night.

Insurance: A catchall category, whether we are talking about life insurance, health insurance, long term care Insurance or an umbrella policy, having the proper coverage in place prevents the best of plans being derailed by a catastrophe. We sympathize with the idea that many of these recurring premiums will not result in an actual return on investment, but they allow you to facilitate other strategies. 

Okay, so you have those bases covered, now you can shift gears to what may be the more fun part of savings and investing like how you plan to spend that money in the future or what you intend to leave behind. Being realistic about your discretionary spending is critically important, if you like to travel and dine out frequently, safe to assume you may need to set aside more than a homebody. Also, you need to be mindful of the fact that when you have more free time you are apt to spend more money, it’s reasonable to think that you spent more money on Saturday than you did Monday through Friday when you were working. When you have a solid number in place your advisor can help determine what that figure may look like in the future accounting for inflation.

Really good advisors will use sophisticated financial planning software where tinkering with assumptions can produce countless scenarios based on your personal model. For example, you may want to be conservative with your investment strategy if market volatility makes you uncomfortable, or you may decide to use below average return expectations as you would prefer to be “pleasantly surprised” if the markets deliver better results. Or you may opt to model in buying that second home when you are 65 and selling it when you are 85. Many of our clients have spending bands where from one decade to the next their spending patterns adjust based on their ambitions and health, spending more in the early years and perhaps a bit less after the “retirement honeymoon.” In the end much of this is about probability theory and just plain math.  Harness the power there, accept its limitations but most importantly trust the process. It’s far better to have the facts and figures rather than keep throwing money at the problem or burying our heads in the sand as the task may seem daunting or downright pointless. Hopefully having gone through this exercise you will feel more empowered that your path looks promising, and you can also start to think more about defining your monetary/material legacy for when your time on this planet comes to a close. 

What is your vision for your wealth after you are gone? Leave each child $1 Million? Endowing a scholarship for young people attending your alma mater? Providing for charitable causes near and dear to your heart at your death and into the future. Take some time to think about this, it’s not about acknowledging your mortality so much as seeing your plan to its rightful end. This may be the right time to incorporate the next generation into the planning, identifying your power of attorney or executor or handing the baton to the family’s future CFO.

For the most part, people believe in the concept that we don’t take our worldly wealth with us when we pass away. So, when our income and savings exceed our own needs, it is perfectly okay to start incorporating more of the wants/desires into the equation.

There is nothing better when as a financial professional you can help facilitate some of this work with your clients. Here are some real-life examples where our clients have spent both human and financial capital:

Experiences: Are there places that you would like to see? Should you stay at a nicer hotel in a better location? Fly business versus coach for that long international flight. Or do you already have a special place that you love to get away to and you are wondering if you can buy a property? Celebrating a family milestone with the entire family at a destination with a great draw. 

Time with friends and family: While we have all heard it’s the most precious commodity you can’t create more of it, something we have a more profound appreciation of when we get older,  using it more wisely to engage with the important people in our lives has been proven to provide happiness and improve quality of life.  Maybe it's organizing a tailgate at your college’s football game or having a girl’s weekend, these are often priceless experiences.

Family support: Giving with a warm hand as the saying goes. Perhaps picking up the tab for a family member’s education or helping a child to be able to take a career pivot to follow a passion.

Personal Fulfillment: This could be a more expensive hobby, learning a language or taking a few college courses. Staying stimulated mentally and socially will improve those later years in life. Odds are that you do not need all your money squirreled away for your time in the nursing home and just maybe these things help you avoid that stay all together.

We wouldn’t be doing our job well if we did not help you really understand the facts and how very empowering that information is to have at your disposal. Think about how your life might be different if you knew that you could live at your current standard of living with ease and, in fact, you could spend an additional $5,000 or more on a monthly basis. Consider all the things that you personally could do with an extra $60,000 in a year? Would you travel? Would you give it away to family, friends, or charity? Knowing your numbers and giving yourself permission to spend can be a substantial change if you are a natural saver. The psychology of money plays a crucial role in determining how much is too much. Some individuals find comfort and security in amassing wealth, while others derive satisfaction from spending and sharing their resources. 

Fear of financial insecurity, even among the wealthy, can lead to excessive saving and reluctance to spend. Addressing these psychological factors through financial education and counseling can help individuals find a healthy balance. Get a little outside of your comfort zone with the planning and put your advisor’s objectivity and expertise to good use.

The views expressed represent the opinions of Breakwater Capital Group as of the date noted and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. The information contained has been compiled from sources deemed reliable, yet accuracy is not guaranteed.  

Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website. Past performance is not a guarantee of future results.