How Much Is Enough?

“How much money do I need?”

It sounds like a straightforward question.

You might expect there to be a number. Perhaps £500,000. £1 million. £2 million.

Yet on its own, none of those numbers tells us very much.

£1 million could be more than one person ever needs and nowhere near enough for someone else.

The more useful question is:

Enough for what?

What Are You Building?

Imagine asking a builder: “How many bricks do I need?”

Their first question would probably be: “What are you building?”

A garden wall and a four-bedroom house need very different amounts of material. You can't sensibly calculate the materials until you know what you're trying to build.

Money isn't that different.

Before deciding how much you need, you first need some idea of what you want the money to make possible.

That could mean retiring at 60 or working three days a week from 55. It might mean travelling, helping your children buy their first home or simply knowing that you have enough put aside to cope when something unexpected happens.

Perhaps leaving money to your children matters to you. Perhaps you'd rather help them while you're alive.

Maybe you have no desire to stop working at all.

The blueprint comes first.

Only then does it make sense to start counting the materials.

The Same Amount Can Mean Very Different Things

Imagine two couples who are the same age and have exactly the same amount of money.

They own similar homes. Their pensions and investments are worth the same. On paper, their financial positions look almost identical.

The first couple want to retire at 55. They enjoy travelling, plan to replace their cars regularly and want to help their children financially.

The second couple enjoy their work and expect to continue until their late 60s. They spend less, travel occasionally and don't expect to provide significant financial support to their children.

Do they have the same definition of enough?

Clearly not.

This is why comparing your pension or investments with somebody else's tells you surprisingly little. The number only makes sense when you understand what you're asking it to do.

Start With Life, Then Work Backwards

When we build financial plans with clients, some of the most useful conversations happen before we start looking at pensions and investments.

• What would you actually like life to look like?
• When would you like work to become optional?
• What do you enjoy spending money on and what would you like to do more of?
• Is helping your family important?
• How much financial security would make you feel comfortable?
• What would you like to leave behind?

These aren't always easy questions to answer.

Ask someone how much money they want and they may give you a number.

Ask them how they want to live and the conversation changes.

Money starts to become connected to something real.

Turning Life Into Numbers

Once you have some idea of what you want your money to support, you can start putting numbers around it.

Suppose you would like to retire at 60.

That's a starting point, but it still doesn't tell us whether you have enough.

We need to understand what retirement might look like. That means thinking about everyday spending as well as the things that don't happen every month, such as holidays, replacing cars, home improvements or helping family.

We also need to understand what income you might have from pensions, the State Pension or other sources and how your spending could change as you get older.

Financial planning can then start bringing those different pieces together.

We can look at the money you already have, what you may build in future, the income you expect to receive and what you want to spend. Cashflow modelling can help us explore whether those resources appear capable of supporting the life you've described.

The process is essentially:

What do you want your life to look like?

What might that life cost?

What resources do you have to pay for it?

Now the number has a purpose.

Enough Doesn't Mean Certain

Of course, we're talking about the future.

Nobody knows exactly how long they'll live. We don't know precisely what inflation will be, what investment returns will look like or what unexpected costs might appear.

Your plans may change too. The retirement you imagine at 50 might look quite different when you reach 65.

So financial planning cannot identify a magic number and declare:

“You need exactly £847,263. You're sorted.”

That would imply a level of precision that doesn't exist.

A useful financial plan is built on assumptions and needs room for things not going according to them.

If part of the plan relies on invested money, it’s value may rise and fall, you may get back less than you invested. Returns aren’t guaranteed.

Rather than pretending these uncertainties don't exist, we can explore them.

We can look at what might happen if you retire earlier, spend more than expected or investment returns are lower than assumed. We can also see how decisions such as helping your children financially might affect the longer-term picture.

The aim isn't to predict exactly what will happen.

It's to understand whether your plans look reasonable, where the pressure points are and how much flexibility you have if life turns out differently.

“Enough” isn't certainty.

It's a judgement that needs reviewing as life changes.

What Happens When You Already Have Enough?

There is another side to this question which gets much less attention.

What if you already have enough?

Imagine you've spent 30 years working, paying the mortgage, contributing to pensions and building investments.

Those behaviours have served you well. Saving became a habit. Perhaps earning became a habit too.

Every year the numbers got a little bigger. There was always an obvious direction of travel:

More.

Then you build a financial plan.

Based on reasonable assumptions, the plan suggests you appear to have enough to support the lifestyle you want, retire when you want, keep a sensible margin for the unexpected and leave behind whatever you have decided matters to you.

A different question appears:

What is the additional money now for?

More has an obvious score. £1.1 million is more than £1 million.

If the objective is simply to accumulate as much as possible, you can never finish.

Enough is more difficult because it requires you to decide what matters.

Would you rather have more money at 65 or more time at 55? Would helping your children now mean more than leaving them a larger inheritance later? Would you rather continue working full-time or perhaps reduce your hours?

There aren't universally correct answers.

You might love your job. You might enjoy building your business. You may want to create significant wealth for future generations.

There is nothing wrong with wanting more.

The important question is whether more is serving something you genuinely want or whether making the number bigger has quietly become the objective in itself.

For much of our lives, sensible financial behaviour tends to point in one direction.

• Earn.
• Save.
• Invest.
• Pay down debt.
• Put something aside for later.
• Think about the future.

Then, eventually, later arrives.

The habits that helped you build your money aren't necessarily the same habits that will help you use it.

Someone who has spent 30 or 40 years saving can find spending surprisingly uncomfortable. Someone who has always measured progress by earning more can find the idea of working less difficult, even when they can afford to.

The financial challenge has changed.

It may no longer be about accumulating enough. It may be about becoming comfortable using what you've accumulated.

More Money Has a Cost Too

Suppose somebody could afford to retire today but decides to work another five years purely because they would like to accumulate more.

At the end of those five years, they'll probably have more money.

That isn't the only thing they've spent though.

They've also spent five years getting it.

Perhaps that's exactly what they wanted to do. If they enjoy their work, the decision may make perfect sense.

Someone else might look at the same choice differently. They might value having more time while they're healthy, seeing more of their family or doing something they've postponed for years.

Money gives us choices.

Time is what those choices are spent on.

Once you have enough, the question can gradually change from:

“How do I build more?”

to:

“What do I want to do with what I've built?”

Having enough doesn't mean you should immediately retire, start spending more or give your money away.

You might choose to do none of those things.

What changes is that some decisions which were previously dictated by financial necessity can become choices.

You can continue working because you want to rather than simply because you need the income. You might reduce your hours, change career, help your family, travel more, spend more or give more away.

You might continue living exactly as you do now.

Having enough doesn't tell you what to choose.

It gives you more freedom to make the choice.

So, How Much Is Enough?

Is £500,000 enough?

Perhaps.

What about £1 million? Or £5 million?

We still can't answer until we finish the sentence.

• Enough to retire when?
• Enough to spend how much?
• Enough to help whom?
• Enough to leave what behind?
• Enough to cope with the unexpected?
• Enough to make which choices possible?

Only when we understand those things can financial planning begin turning “enough” into something measurable.

Even then, it won't be a perfectly precise number. Life is too uncertain for that.

Which is why, before asking:

“How much money do I need?”

there may be a more useful question.

“Enough for what?”

Although the content of the article was correct at the time of writing, the accuracy of the information should not be relied upon, as it may have been subject to subsequent tax, legislative or event changes.

Matthew Birkett
Chartered Financial Planner
Birkett Financial Planning