How Much Do You Need to be Rich?

Once in a while, when my friends and myself hang out for a drink, we inevitably talk about business, work and how much will we be happy to live comfortably and even feel rich? I have given this topic a lot of talk and rather than having a firm number in my head, I have actually thought of several levels of networth and how they will affect my “standard of living”.

$1,000,000 in investible assets – Is this enough?

Studies have shown that if you want to ensure you have sufficient funds in your retirement, it is better to withdraw 3% to 4% annually. Withdrawing 5% annually increases the likelyhood of a shortfall. However, these studies assume that all you have is a million dollars. Think about this for a second, a million dollars only gets you $40,000 annually before tax!. That works out to slightly over $3,000 a month. Assuming your house is paid and you have no debt, $3,000 a month will probably cover basic expenses like food, health insurance and long term care. There is probably no room for luxury.

When you have only one million dollars to retire on, you have to essentially manage it to make sure you do not run out of money (that is assuming you are retiring at 65). When you are in your mid 30’s, 40’s or 50’s, you are in great shape if you have a million dollars because it will grow. But you still need your “job” or to “be in business”! I would only feel rich if I knew that I could not only live off the income that my investments generate but also not dip into the principal.

So What is Enough?

Before we get into how much is enough for me to fee rich, the first step I did was to look at my expenditure. Firstly, I assume I have paid down my house. I will then breakdown my expenses into three categories : essential expense, quality of life expense, anything you want expense.

Essential Expenses – Essential expenses include food, house maintenance, bills (utilities, cable, internet connection etc), insurance payments (home and auto), health insurance payments, long term care insurance. I think this amount will work out to about $2000 to $3000 a month for me.

Quality of Life Expenses, – This is a subjective area because we all have different meaning of quality of life. For some, it is a golf membership, for others it means having money to go on vacations with their grand kids.

For me personally, it means being able to subscribe to tons of magazines, not feeling guilty of getting a Starbucks Venti everyday, being able to eat out often, paying for gym memberships and perhaps even a golf membership. Plus four vacations a year. I think I will need an additional $3000 to $4000 a year.

Buy Anything You Want Expenses – That to me means being able to take a monthly 3-4 day vacation, fly first class, stay at a suite in a 5 star hotel. I guess for Mrs Credit Card, it means being able to any handbag or shoes that you want without feeling any guilt. It also means being able to donate to charity, do charity work and still really enjoy life. I do not live such a lifestyle and I’d guess an extra $15,000 a month would be great!

So where does that leave us?

In my opinion, to be able to walk away from your work and retire (chill out) straight away, I would need two million to feel rich and comfortable. Why? Well, with two million, I would invest my money in a balanced (growth and income) portfolio whereby 50% will be in bonds (tax free municipals) and the other 50% in equities. The one million in equities will give me about $36,000 in tax free income, which should just about cover essential expenses. But the other one million will be invested in equities for growth and to outpace inflation. Hence even if I’m 30 or 40 or 50 years old, I would be comfortable walking away from the rat race with two million dollars.

If I want to live really comfortably and walk away from it all, I would feel rich with about four million dollars. Once again, my logic is to invest two million dollars in tax free municipal bonds which will give us an income of about $70,000. The other two million will be invested in a diversified equity portfolio.

For me to live the extravagant life, I think I would need about fourteen million dollars. The way I arrive at this is by assuming I would need $25,000 in monthly income or $300,000 in annual income. To generate $300,000 in tax free income, I would need about seven million in municipals bonds. But to keep up with inflation and increase wealth, I would like to have another seven million to be invested in equities.

So Where Would I settle?

Well, I would feel rich if I have five million dollars. Though I will not be able to live my “dream” lifestyle, I would have enough to live comfortably and do the things that are important to me. With this level of wealth, I could also grow my wealth without having to dip into principal.

Do you agree with my analysis? Share your thoughts below.