When Less Is More

The other day, I received a newsletter with a story that some of you may have read before:

An American tourist was at the pier of a small coastal Mexican village when a small boat with just one fisherman docked.

Inside the small boat were several large yellowfin tuna. The tourist complimented the Mexican on the quality of his fish and asked how long it took to catch them.

The Mexican replied, "Only a little while."

The tourist then asked, "Why didn't you stay out longer and catch more fish?"

The Mexican said, "With this I have more than enough to support my family's needs."

The tourist then asked, "But what do you do with the rest of your time?"

The Mexican fisherman said, "I sleep late, fish a little, play with my children, take siesta with my wife, Maria, stroll into the village each evening where I sip wine and play guitar with my amigos, I have a full and busy life."

The tourist scoffed, " I can help you. You should spend more time fishing; and with the proceeds, buy a bigger boat: With the proceeds from the bigger boat you could buy several boats. Eventually you would have a fleet of fishing boats. Instead of selling your catch to a middleman you would sell directly to the processor; eventually opening your own cannery. You would control the product, processing and distribution. You could leave this small coastal fishing village and move to Mexico City, then Los Angeles and eventually New York where you could run your ever-expanding enterprise."

The Mexican fisherman asked, "But, how long will this all take?"

The tourist replied, "15 to 20 years."

"But what then?" asked the Mexican.

The tourist laughed and said, "That's the best part. When the time is right you would sell your company stock to the public and become very rich, you would make millions."

"Millions?...Then what?"

The American said, "Then you would retire. Move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siesta with your wife, stroll to the village in the evenings where you could sip wine and play your guitar with your amigos."

I found it to be a reminder that sometimes we have our priorities mixed up. If our goal (whether conscious or not) is to make more money to be able to afford a better lifestyle, we shouldn't forget what we're giving up in order to get there.

Googling Your Retirement Number

There's definitely more than one way to define what it means to have enough money. One basic way is to define it as "having enough money so that you can maintain your current standard of living without having to work for money."

So how much is that? Here's a quick and dirty way to come up with an approximation in one line using Google. The simplest way to illustrate it is with an example. We'll assume the following for our example:

1. Your household income is $60,000/year.


2. You'll want to retire in 20 years.


3. You'll be able to maintain your current standard of living on 85% of your current salary (it's assumed that once you retire, you'll save on things like commuting costs, work clothes, etc.).


4. Your savings will be invested in a typical allocation of approximately 60% stocks/40% bonds.


5. You'll be able to withdraw 4% of your savings the first year of retirement and increase that by the rate of inflation each year thereafter.


6. Inflation is 3.5%/year.

Using Google's built-in calculator, just type the following in to a Google search box and hit enter:
(1.035^20)*60000*85%/4%

The answer: $2,536,980.80

This represents how much you would need to have saved up 20 years from now in order to be able to "live off your savings." If you're already there, great! If not, having a goal in mind can help with Getting to Enough.

So what did the gibberish that you typed into Google mean? Let's break it down:

(1.035^20) This represents the compounding effect of inflation of 3.5% inflation over the next 20 years before retirement
*60000 This represents our assumed current salary (and assumes that this represents our current standard of living)
85% This is assuming we will be able to live off the equivalent of 85% of our current standard of living at retirement
4% This represents being able to take out 4% your savings for the first retirement year's expenses

Replace the numbers in our assumption with your own numbers (especially your salary and the number of years to retirement) to come up with your personal approximation of "enough." A warning, though: Don't be too optimistic about how much you can take out that first year (don't go much above 4%) and don't be too optimistic about inflation (don't go much below 3.5%) in an effort to lower the amount you feel you need.

Of course, one line in a calculator or Google can't give you a definitive answer as to how much money is "enough," but at least it will give you a starting point. The answer will also vary according to the assumptions we made and I'll explore how I came up with these assumptions and how they might change in your own case in future posts.