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How Much Is Enough?
Making Financial Decisions That Create Wealth and Well-being
By Arun Abey Andrew Ford
Greenleaf Book Group Press
Copyright © 2009
Arun Abey and Andrew Ford
All right reserved.
Chapter One THE FOUNDATIONS
Elizabeth and Sebastian Worthington were in their twenties when they got married; she was a teacher and he a senior bank executive. Life was comfortable and luxuries affordable-even in London, one of the world's most expensive cities. After a few years they bought a semidetached house with the thought of raising a family in mind.
By their midthirties, the couple had four boys under the age of six. Now they were reliant on Sebastian's salary alone and faced the classic problems of the single-income professional family. Although his earnings had increased, so had the young father's responsibilities and working hours.
Elizabeth loved being a stay-at-home mother, but the layout of their house caused problems. The small kitchen was separate from the living area, and the stove was within easy reach of small hands.
Feeling guilty about working long hours, Sebastian suggested they renovate by adding an extra bedroom and creating an open-plan, family-friendly living area. It would take time to save the u50,000 they needed, but it would be worth it.
Sebastian's friends at work proposed a much quicker solution than saving. With London property booming, the couple could simply borrow a small deposit for an apartment that was due to be constructed and sell it two or three years later, just before completion, for a handsome profit. His friends claimed that Sebastian and his wife would make much more than they would need to cover the costs of renovating their house-and there would be no capital outlay.
Elizabeth and Sebastian, dreaming of how the renovation would change their lives, were vulnerable. They were beginning to realize that they'd never gain serious wealth even though they were professionals. A wonderful opportunity now seemed to present itself. What, after all, could go wrong with bricks and mortar?
Not long after they borrowed the deposit for the apartment, London real estate went into a tailspin. Seeing stormy times ahead, the developer sped up construction and moved the completion date forward a whole year. The very week that Elizabeth and Sebastian started to get renovation quotes, they received a settlement demand. So bad was the slump by that time that the developer was releasing other apartments in the complex at a discount. The equation was ugly: a loss of u50,000 if the couple sold, or a deposit of u50,000 to settle, which meant the prospect of servicing a large loan-for years.
The stress put their marriage under tremendous strain and took the harried wife and mother to the verge of a breakdown.
MAKING THE RIGHT CHOICES
The Worthingtons' story, based on a real family, is far from unusual. The good news is that there are a number of easy-to-follow strategies you can use to avoid the traps they experienced and get ahead. This chapter explains these strategies and how you can apply them to develop a personal financial framework that will help guide you through life.
We call this framework our Bridge of Well-being. Three pillars underpin it.
1. Define and understand your values and goals. 1.
2. Apply your resources to achieve your goals. 2.
3. Develop your investment strategy. 3.
A sound financial strategy is an important part of enjoying the life you choose to live; investments are an essential part of most financial strategies.
The journey to wealth and well-being is always a work in progress. We should be grateful for this. Life would become pretty dull if one day we woke up and had achieved everything we were capable of accomplishing!
REFLECTIONS: How strong are your "three pillars"? if you have a partner, would he or she give the same answers you gave?
BUILDING YOUR BRIDGE OF WELL-BEING
Lifestyle financial planning focuses on more than simply having more money and possessions than the next person. It involves looking inward to uncover your values and goals, then making choices that are consistent with them rather than treating money as a measure of success. Too few people use plans that reflect what they really hope to achieve in life. You need to develop a financial plan for yourself-not for your money.
Different values and goals require varied financial strategies and investment approaches. For example, decisions about how much investment risk to take will differ between a couple who are caring for a child with a disability and a couple who are DINKS (that is, double income no kids) who vacation at luxury resorts and buy a new car every other year. The aim of lifestyle financial planning is to help you experience the good life you want to live, knowing sufficient money is there to support you.
As we will explore in the coming chapters, beyond a basic level of wealth, researchers can find no direct link between happiness and a high income or a large bank balance. Buying a Mercedes instead of a Lexus, or a $300 pair of shoes instead of some that cost $100, is not enough to make us happy.
Research conducted by ipac securities found there was only one essential factor separating people who rated themselves as highly satisfied with their lives from those who felt vulnerable. This was a sense of feeling in control of their financial situation. It applied whether the individual was making a six-figure salary or was earmarking each paycheck to cover the basic necessities of life.
Those who rated themselves highly satisfied had a financial plan. It wasn't necessarily detailed. Some were as simple as doing a monthly budget or setting basic saving goals. Some weren't even written down, but they were plans nonetheless.
Clinical psychologist Timothy Sharp, author of The Happiness Handbook and founder and "chief happiness officer" of The Happiness Institute, says that financial goals are part of a much bigger goal-setting program. "Truly content people are in control of several key domains of their lives-work, health, recreation, social life, money, and relationships-and they aim to balance their time and effort across them."
REFLECTIONS: Do you feel completely in control of your financial situation now? Do you have a clear financial strategy you are working toward, and is this built specifically to support the life you want to live?
Pillar 1: Define and Understand Your Values And Goals
The starting point is to be clear about your values and goals, which should be consistent with what is important in your life.
Easier said than done? If we all knew exactly what makes us happy, we could do it all the time, couldn't we? That's part of our problem, according to Dr. Sharp. We spend too little time thinking about what would make us happy and disproportionate amounts of time and effort chasing goals that don't bring the satisfaction we seek.
Stephanie Dowrick, author of Choosing Happiness, writes that values can support you when they shift the way you see a situation and respond to it. While it's easy enough to be attracted to noble values such as goodness, kindness, and freedom, the real question is what drives our choices when it comes to the issue of how and where we spend our time, energy, and money.
Later on we explore some ways to determine what's important and what is not. At this point in the discussion, it's important to sort your goals into the following time frames as you think through them:
Short-term, immediate goals relating to what makes your life pleasurable right now. These could include going out weekly to a restaurant, a monthly getaway with your partner, vacations, or attending professional development workshops to improve your chances of career advancement.
Medium-term goals relating to the foreseeable future. These could include acquiring your first house or upgrading the existing one, having a family, educating children, or taking a lengthy vacation abroad.
Longer-term goals relating to when you want to retire, and what your lifestyle will be then. Often you will find that these will be extensions of your medium-term goals.
When setting goals, look forward, not back. This is harder than it sounds, since it goes against our natural inclinations. Too often, people look back at what they've learned, at what qualifications they've achieved, and at what loved ones have identified as their strengths and weaknesses.
The problem with this approach is that your future is dictated by the limitations of your past. As the saying goes, "If you do what you've always done, you'll get what you've always got." Many times we let limiting beliefs get in the way.
While others may be concerned about the possibility of your failing and getting hurt, you are the only one who knows what you really want-and what risks and challenges you're prepared to take to achieve it.
So suspend reality and the limitations of the past and think about what makes you energized and excited about living.
REFLECTIONS: if you had the chance to write the eulogy to be given at your own funeral, what would you like to say you had achieved? if someone were to describe you to a person who had never met you, how would you like to be described?
In The Happiness Handbook, Sharp suggests some simple but powerful exercises to jump-start people's thinking about their personal goals. With his permission, we have included them here for you to practice.
Exercise 1. Visualize yourself in five, ten, or twenty years. Start with twenty years hence. Your life is great; you're really happy. What does that life look like? Now step back to ten years. What are you doing to build toward that great life? How will you plan to achieve those goals? Go back again and repeat this process until you've broken your ideal life into more accessible chunks. At the end of the process you should have an achievable plan. You can then start taking real steps to achieve the life you want.
Exercise 2. Think more often about the changes you need to make to become happier. On a sheet of paper, make two columns and label them Problems and Benefits. In the Problems column, write down as many things as you can think of that you feel will prevent you from making these changes. In the Benefits column, list as many benefits as you can think of that will happen if and when you change. Now go back to the Problems column. Can you easily surmount these obstacles, or do they present major challenges? If they do, rephrase the problem in such a way that you can actually transfer the difficulty to the Benefits column.
For example, one problem you might list is the time required to make the changes. Your schedule during the coming week is the usual juggle of work, family, and social activities-all drawing you in different directions. But maybe the reason that you feel "time poor" is because you have not, in fact, taken the time to plan. One of the benefits of making the changes may well be that they free up time for you to focus on what's important, rather than what's urgent. It's all in the way you look at the problem.
These exercises help you think about what actions you need to take to make changes and realistically assess perceived obstacles.
EXPLORING YOUR GOALS Here are some questions that we and other leading financial advisers use to help clients explore their goals. Take a few moments to think through your own answer to each question.
What is your biggest achievement, and why?
What is your greatest fear in relation to your future?
What motivates you?
What causes you stress?
If you had unlimited means, what's the one thing you would like to do with your time that you are not doing today?
What is the one personal goal you would like to achieve within the next year? What about three to five years?
Where do you want to be in five to ten years time, professionally, personally, and financially?
What is the state of your relationship with your partner, and what do you imagine it will be like in five years' time? What can you do to improve it?
What are your hobbies? What do you like to buy with your spare money?
Is there a legacy you would like to leave in your business life? In your personal life? In your family relationships?
What are the most important things that you and your family want to achieve in the future? How would you feel if you couldn't achieve them? What are you prepared to give up now to achieve them?
How much money is enough? Why? And how do you know?
In chapters 2 to 5, we look with more depth at ways to identify what is most important to you and strategies to achieve a greater sense of well-being-to capture what we call the Happiness Prize. At this juncture, however, it is worthwhile starting with the question "How much is enough for retirement?" as you begin to define and understand your values and goals.
One aspect of determining how much money is enough is planning for security in retirement. Here is a simple rule of thumb to help you estimate the amount of money that may be required.
Once work stops, the young adult children eventually leave home, and expenses decline, most people find that they need around 75 percent of their final working income to sustain a good lifestyle in retirement. (This assumes that the mortgage is paid off and there are no major debts outstanding.) Some people want more, of course, and many get by on much less, but 75 percent is usually a comfortable amount.
To work out how much money you'll need to retire on, simply start with the salary you expect to be earning immediately before you stop work. While we use U.S. dollars in the examples below, you can convert and substitute your own country's currency, whether it is Euros, pounds, rupees, and so forth.
To retire at age 50, multiply your final salary by 11.
To retire at age 55, multiply your final salary by 10.
To retire at age 60, multiply your final salary by 9.
To retire at age 65, multiply your final salary by 8.
To retire at age 70, multiply your final salary by 7.
These numbers are only a rough guide, particularly because they assume the average life expectancy and that all capital is exhausted during your lifetime. If you live for longer than the average, then you will run out of money. Please also note that we have ignored the effects of taxation and U.S. Social Security benefits.
The "How Much Is Enough? Retirement Calculator" we've created provides an estimate of lump sum amounts required for retirement at various ages, using the multiples outlined above. Everyone is different, so the amount you need may differ from the numbers shown. Nevertheless, it provides a useful benchmark.
Our calculator assumes that the required retirement income is 75 percent of final salary and that investments earn a return (after taking inflation into account) of 5 percent annually. If you were to earn a real (after inflation) investment return of 0 rather than 5 percent, however, the effect on the lump sum required would be significant. For example, a male who wishes to retire at age 60 would need a lump sum of 16 times his final salary rather than 9 times if he failed to capture this return-a huge difference.
This reflects the power of compounding over a long period of time. The good news, as we explore in part 2, is that it is within the power of most of us to capture the Investment Prize (which we describe later in this chapter under the heading "Pillar 3: Develop Your Investment Strategy"), which provides a good chance of earning a real return of 5 percent per annum over the longer term.
Females usually require more for retirement because they enjoy a longer life expectancy. For example, on average a 45-year-old female today can expect to live approximately 5 years longer than her male counterpart.
To retire at age 50, multiply your final salary by 12.
To retire at age 55, multiply your final salary by 11.
To retire at age 60, multiply your final salary by 10.
To retire at age 65, multiply your final salary by 9.
To retire at age 70, multiply your final salary by 8.
To estimate how much money you'll need and to see the impact of varying such factors as your expected retirement age, visit our website at www. howmuchisenough.net and use our proprietary retirement calculator. This easy-to-use tool enables you to specify a number of variables, including gender, desired age of retirement, current salary, proportion of current salary required in retirement, and the level of investment return expected.
Once you have determined your goals, you may find that you have such a long list that you can't possibly achieve them all. If so, then it's time to make some choices. None of us can have everything we want, so we need to prioritize. We have to choose between money spent today on short-term goals such as leisure activities and money saved for the long term so that we could, for example, retire earlier. In chapter 4 you'll find valuable ideas to help you choose what's of most importance to you. At this point, however, you should concentrate on the second pillar in your Bridge of Well-being.
Excerpted from How Much Is Enough? by Arun Abey Andrew Ford Copyright © 2009 by Arun Abey and Andrew Ford. Excerpted by permission.
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