A number, a date, and what it is for

Ask someone how much would be enough and the honest answer, most of the time, is more than this.

That answer has a property worth noticing: it is true at every income. It was true at 30,000 and it is true at 300,000, which means it is not a fact about the money. It is a fact about the question, which has no answer in the form it was asked.

Why the third part is load-bearing

A number without a purpose has nothing to be measured against, so it gets measured against other people's numbers. That comparison never terminates, because there is always a larger one, and the target rises to meet whatever you have most recently achieved.

A number attached to a purpose behaves differently. Enough to stop taking work I dislike. Enough that one person's illness does not end the household. Enough to spend a decade on something that may not pay. Each of those has a size. Each stops being useful past a point. Each can be checked off.

The test is whether you could tell, from the inside, that you had arrived. If the answer is no, the third part is missing.

The number is a division, and one of the terms is a guess

The arithmetic is unremarkable. The pile has to produce the spending, so the pile is the spending divided by the rate you can draw from it.

Everything then depends on that rate, and the rate is not observable. It is a function of returns that have not happened yet, over a period whose length you do not know, net of costs you can only estimate.

The model below is that division, run forwards. The spending is fixed at four percent of the starting pile. The only control is the real return you assume.

Withdrawal sustainability

≈ Hypothetical model, not a forecast

How long a portfolio lasts at a chosen withdrawal rate, and the rate that would last forever.

It assumes

• The return is real, so the withdrawal keeps its purchasing power throughout.
• The same return arrives every single year, in the same amount, in order.
• The withdrawal is taken at the start of each year, before that year grows.
• Nothing is paid in tax and no income arrives from outside the portfolio.

It ignores

• The order in which returns arrive, which matters enormously here
• Tax on withdrawals, on income and on gains
• Spending that changes with age, health or circumstance
• Any income from outside the portfolio
• How long the person doing the withdrawing actually lives

Find the real return at which this pile stops emptying inside the forty years. Note how large a change in an unobservable assumption it took.

Real return2%

Taken out each year

24,000

Real return after the fee

1.5%

Balance at the horizon

0

Total taken out

743,406

Year the portfolio empties

31

Portfolio empties inside the horizon

1

Rate the portfolio could sustain forever

1.478%

Rate that lasts exactly to the horizon

3.293%

• Balance
• Taken out to date

◷ Not there yet — keep moving the controls.

Somewhere around three point two percent, the picture flips from a pile that empties to a pile that lasts. Just over one point of difference in a number that nobody can look up, and it decides whether the plan works.

Which is the real content of this lesson. The number is not a fact about your life. It is a fact about your life and one assumption you cannot verify, and the honest version of a target carries both.

Predict

Two people want the same annual spending in retirement. One assumes a real return a point higher than the other. Roughly how different are their targets?

Choose one answer

A few percent apartAround a fifth to a third apartRoughly doubleIdentical — the spending is the same, so the target is the same

Lock in answer

Not the same thing

Enough as a score

A number chosen because it is larger than the current one, with no stated purpose attached to it.

Measured in

Position relative to other people, and to your own last balance

For example

A target that has been revised upward every time it came within sight.

Chase it alone and

It cannot be reached by construction, because the reference point moves with the balance. Thirty years of progress produces the same feeling as year one.

Enough as a purchase

A number derived from a specific thing it buys, with a date and a stated set of assumptions.

Measured in

Years of spending covered, and whether the named purpose is now available

For example

Enough that a bad year at work is an inconvenience rather than an emergency.

Chase it alone and

The purpose can be badly chosen, or can change, and a target derived from an outdated purpose is precise about the wrong thing.

Which is which? Put each one on a side.

• A target of one million, chosen because it is a round number

  Enough as a scoreEnough as a purchase

• Enough that a two-year gap in income would change nothing structural

  Enough as a scoreEnough as a purchase

• Whatever the person one rung ahead has

  Enough as a scoreEnough as a purchase

• Enough to work three days a week for the next decade without the numbers breaking

  Enough as a scoreEnough as a purchase

The date does more work than it looks like

A number with no date is a wish. The date is what converts the target into a required rate of saving, and the required rate is what makes the target negotiable.

It also runs the other way, and this is the part people find useful. Given a number and a saving rate, the date falls out. If the date is unacceptable, only three things can move: the number, the rate, or the acceptance.

Making that a conscious choice, once, is worth more than any amount of vague resolve. It converts an open-ended anxiety into a specific trade you have looked at.

Check

Someone has hit the number they set eight years ago and immediately set a higher one. What is the most likely diagnosis?

Choose one answer

The original number had no purpose attached, so arriving at it produced no signal that anything had been achievedThey are being prudent, since circumstances changeThe original number was miscalculatedThey enjoy the accumulating more than what it buys

Check answer

Worth remembering

• Enough needs three parts: a number, a date, and what it is for — and the third one holds the first two still.
• The test of a purpose is whether you could tell from the inside that you had arrived.
• The number is the spending divided by a sustainable rate, and that rate is an assumption rather than an observation.
• Assume two people differ by one point in the return they expect, and their targets can differ by a fifth or more.
• Given a number and a saving rate the date falls out, which turns a vague anxiety into a specific trade.