There has been debate for years in the financial planning community (and political circles) about the level of assets that makes a person “rich.”  Is it $1 million dollars in Net Worth?  …$10 million?  …$100 million?

Over the years, we have served clients with modest assets who feel rich.  We have also served others with more than they could ever spend, yet they feel poor. One thing we do know about being rich:  high income does not equal rich. 

True wealth is a matter of dependency.  If you are dependent on a job or a person for financial resources, you are not wealthy.  What we refer to as “retirement savings” is actually a quest to become financially independent.  However, even financial independence is a concept that is relative to a person’s lifestyle or level of consumption.

William P. Bengen forever changed the definition of “rich” in the mind of many financial advisors – including us.  He developed what is commonly known to us as the Four Percent Rule.  This is a rule of thumb whereby if you withdraw no more than 4% of your portfolio value each year in retirement, you should never run out of money.

His theory addresses the relativity issue.  This benchmark is typically our starting point in the discussion because there are many other considerations – including the implications of early retirement. The math is simple:  For every $1 million in savings, you should be able to safely withdraw $40,000 per year for living expenses.  The key term is “should”.  We are currently in an extremely low interest rate environment, so each case needs to be analyzed independently. 

Here’s what we have observed; the lower the withdrawal percentage, the greater the level of financial independence.  For example, a person with $3 million that only needs $90,000/year (3%) from their portfolio is truly financially independent.  A person needing $600,000/year from the same portfolio value will run out of money in 5-6 years.

We have observed that the following factors have the greatest impact on financial independence:

1. Family Beliefs: For better or for worse, family values regarding spending levels tend to get perpetuated, unless they are consciously evaluated and behaviors changed. 
2. Social Pressure: Peer pressure is one of the most insidious risks to financial planning goals.  The adage “you become part of who you are around” is certainly true when it comes to spending behaviors.  Our social circles can act as strong governors or horrible enablers when it comes to financial decision-making.  
3. Source of Funds: Saved money is handled very differently than borrowed, inherited or other windfall money. Saved money tends to be spent very carefully and slowly. 
4. Vision: Having a plan with specific savings goals tends to have amazing results. It is one thing that can overcome the power of inherited family beliefs and social pressure.

So, let’s just make it easy.  If we run financial projections using your “actual” spending levels and you have plenty of funds to live to age 100, you can feel comfortable that you are truly financially independent.  Even then, only if your name is William Vanderbilt should you consider rolling up $100 dollar bills and smoking them (an act the millionaire allegedly committed over 100 years ago). I’ll bet his heirs today wish he hadn’t been so frivolous in order to simply impress his friends!!

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