Most people would agree that a lottery winning of a million would be very nice indeed. Some would however argue that a million wasn’t anywhere near enough. I was with a bunch of colleagues debating just that when one of them asked this: “Just how much money is enough – to do what exactly?”
Of course, it depends. The amount of money that would be enough to simply get by would be very different to the amount of money required to live a grand lifestyle. So I’ve tried to break the question down into various components below.
To get by:
If all you are interested in is getting by, you will simply need a little more money available than your monthly expenditure each month. A surplus would of course be welcome for unforeseen expenses, and it would be prudent to build a savings reserve of around three month’s income to give you a bit of leeway if you were to lose your job. But is that enough? Many people simply get by because they spend almost everything they earn. But how satisfying is a lifestyle like that? You couldn’t be blamed for feeling like you had nothing to show for all your hard work after several years of simply getting by.
To be comfortable:
Let’s assume that the definition of comfortable is the ability to feel financially secure, that your state of mind is free from financial stress and that you are able to afford everything you need and most of the things you want. How much money is enough to enable you to enjoy this state of wellbeing? Well, the numbers themselves are less important than you would think. This is because many people who earn well find themselves merely getting by due to a high maintenance lifestyle. To be comfortable, you may need is to have income well in excess of your expenditure, with a surplus of six months net earnings available at short notice.
Retirement is the act of ceasing to work. Which is what you do – albeit temporarily – when you take a holiday. Retirement can therefore be interpreted as the longest holiday of your life. How much money would be enough to sustain you? Well, using today’s annuity rates (this is an income you would receive each month in exchange for your pension pot, payable for the rest of your life), you’d need a pot large enough to pay you your required income at approximately 6% from age 65. In other words, if you required an income of £30,000 per annum in retirement, you would need a pension pot of £500,000. This is a significant amount of money and why it is important that you start building your pension pot at as early an age as possible.
To leave your dependants:
If you have a family and are concerned about their wellbeing after you die, the first thing to ensure is that all your debts are cleared off on your death. But is that enough? Probably not. If your dependants rely on your income, you would need to take additional insurance to ensure that your income was replaced so that the loved ones you leave behind aren’t financially disadvantages.
Yes, a lottery winning of a million would go a long way towards relieving any financial anxiety, however those of us who live in the real world should take stock of our options and start planning as soon as possible. Speak to your financial adviser.
Akwasi Duodu, IFA Sterling & Law Group plc