Guilty as Charged: How Do You Know When Enough is Enough?

Many of us started with nothing (except that egg money, Joe) but did have the good sense to pay attention to parental and other financial advice, particularly about “never” dipping into those retirement savings accounts… let’s call ‘em our capital preservation reserves. In fact, we were told to set aside emergency (Rainy Day) funds specifically to avoid invading our retirement funds prematurely. In short, hoard those long-term, revenue-producing capital accounts at all cost because that’s what makes the Amazing Power of Compounding work so efficiently on our behalf across a 40-year career. The money steadily saved and the income it produces in those capital accounts will grow like topsy if left alone.

Relentless Habits

For some of us, this capital preservation habit becomes so ingrained in our financial toolbox that we never relent… even after it has served its worthy purpose; even after we enter that phase of life the habit prepared us for – those golden years. In short, at the very time we should be enjoying all of the fruits of our labor we just can’t seem to bring ourselves to do it.

‍Hands off those pots of capital, our subconscious screams! Thus, we find ourselves spending only the income derived from these carefully accumulated reserves of capital.

Hard Habit to Break

It’s an exceedingly difficult habit to break. The government has been very quick to slap our hands and penalize us 10% if we tap into our 401(k) or IRA retirement funds prematurely. And Uncle Sam also warns us not to request those hard-earned Social Security checks too quickly (often wise advice but not always).

We hear all of the horror stories about how so very few people enter retirement with sufficient savings. These rumors are frightening and take a toll on us. We fret about outliving our resources as we watch our capital reserves grow in size. Fair enough, but how much is enough?

Economics 101

I’m reminded of those Economics 101 principles learned long ago, but one in particular stands out as I write this blog: the diminishing marginal utility of income and wealth... that each additional dollar we earn provides less satisfaction and happiness than the dollar before… that going from zero to $500,000 in assets provides a much bigger boost to our happiness and well-being than going from $1 million to $2 million.

Might we safely assume that the same diminishing marginal utility principle applies to security as well as happiness? Where do we draw the line about the degree of security we need to feel comfortable in retirement: $500,000; $1 million; $2 million, etc.?