The title of this blog is that fundamental question: how much is enough? Much of the thinking around FIRE boils down to answering this question.
And as with so many good questions, the answer depends on perspective. And perspective itself depends, among other things, on height. And I think height is a useful metaphor for explaining how much is enough for me.
Ceilings vs floors
I remember my scorn about twenty years ago for my friend W, who was my most earnings-focused mate, when he told me that “I couldn’t live on a salary less than £100k”. At that point I earnt less than half that and very much saw £100k as a ceiling, not a floor.
In any case, these days I’m afraid I would now regard £100k p.a. as definitely a floor. And I mean £100k post tax, of actual money that I could spend. It would fund my ‘needs’: groceries, utilities, transport, medical bills, household cleaning and maintenance, and such like. It would also pay for my investment expenses, though obviously there is a ‘circular reference’ here (as the more that is ‘enough’, the higher the expenses that ‘enough’ needs to fund!).
My ‘needs’ are based on relatively low housing costs. I don’t have a mortgage on my home. I am also ignoring my house as an asset – so it is not part of the ‘enough’ calculation either.
Based on a 4% Safe Withdrawal Rate (a.k.a. the 25x rule), £100k p.a. needs a pot of £2.5m. Tax would complicate that somewhat, but assuming I remain married, and that the current allowances remain in place, I am prepared to ignore tax, for the moment. Certainly I know people earning almost £90k who have <10% tax, and I think as a couple we could make the tax at £100k p.a. relatively minimal.
Or perhaps one should think of the tax liability as roughly equivalent to the state pension/benefits which, in other respects, I am ignoring for the purposes of ‘enough’ calculations.
In actual fact, whether £2.5m turns out to be enough depends on two key questions:
- What return does the portfolio deliver in the long term, and
- In what order (or sequence) – i.e. if it alternates 15% and -5% every year, you do much better if you begin with a +15 and not a -5.