Enough

In his 2008 book - Enough: True Measures of Money, Business, and Life - the iconic Jack Bogle (founder of Vanguard Funds) told the story of a party hosted by a billionaire hedge fund manager at his home in Shelter Island, New York. At the party, the author Kurt Vonnegut informed his friend Joseph Heller, that their host had made more money in a single day than Heller had earned from his massively popular novel Catch 22 over its whole history. Heller responded, “Yes, but I have something he will never have… Enough.”

This is a simple idea, but its eloquence is profound. Two people earning the same income and with the same prospects can have different definitions of what enough is for each of them. One of them might be able to live happily on 50% of their take home income and save the rest, while the other person might think they need to double their income before they could truly be happy. Put another way; what I considered enough when I was backpacking around Asia and spending $5 per night on hostels, is different than what I consider enough today.How do you figure out what enough means to you? We believe this process involves defining your lifetime (how much you will spend) and legacy goals (how much you will give away), creating a set of baseline assumptions, and then running detailed long-term cash flow projections.

You would think that this kind of goals-based wealth management approach would be standard in 2019, but you’d be amazed at how much of the industry still doesn’t operate in this way. Much of the investment and wealth management community still defines success as how well your investments perform and whether or not they beat their benchmarks. But what is the point of beating a benchmark or even making more money, if you don’t know how much money you need and what that money is for? Many people take unnecessary risk to try to get higher returns. This can work out well when markets are up but very badly when markets fall.

Let’s look at a simple, concrete example to illustrate exactly how goals-based wealth management works in real life. Let’s say you’re 55 today and you’d like to spend $100,000 per year (increasing with 2% inflation) for the rest of your life. If we conservatively assume your diversified investment portfolio will earn a 4.5% rate of return, and you will live to age 95 (among other assumptions), our model suggests you need $3.1 million today to ensure you will not run out of money prior to age 95. It’s interesting to note that a $100,000 annual spending rate, inflated by 2% a year over a long-term period, becomes $221,000 per year by age 95.

Then of course, you need to answer other questions including – might our annual spending rate go up over time, do we have plans for major purchases (e.g. vacation property, new business etc.), would we like to leave money to our children and charities when we die, and what if investment returns are lower than we expect (-- higher returns are usually not a problem!). You also need to determine how much additional capital will be needed to fund these extra goals and provide protection from bad surprises?

So what does all of this mean in practice? It means that everyone needs to think about how all of these these planned spending numbers mesh with their overall family portfolio. If you will need $3.1 million to fund your basic spending goals until 95, you should probably make sure that at least $3.1 million is invested in some combination of modest risk assets that are likely to be relatively stable, keep up with inflation and be readily available when needed. There is no need to reach for risk and try to get a bit higher return. It is enough.

Some people with significant investment portfolios may choose to fund personal spending goals entirely with fixed income. This way they know that whatever happens in the stock market, or in the world at large, they will have enough money set aside to cover their projected lifestyle spending for the rest of their lives. This simple exercise can provide an enormous amount of peace of mind and helps clients avoid having to think about money when their head hits the pillow each night.But what if you have $15 million available in your portfolio? If you believe that you won’t have significant additional lifetime spending beyond the $100,000 per year budget, and that the $3.1 million in a modest-risk portfolio is sufficient, the question then becomes - How do you think about the other $11.9 million?

The cash flow projection model shows you won’t need this money for lifetime spending, so we view it as a ‘legacy asset’ that will either be left to your children or donated to charity. This means this portion of your portfolio really has a time horizon of 40 years or more (age 55 + 40 years = age 95) based on our longevity assumption. Longer-term and more optional goals can be funded with higher risk assets. This kind of time horizon can allow for a mix of asset classes designed for long term growth. Depending on a client’s risk tolerance, this usually means some combination of public equities, and alternative investments such as private equity, real estate, infrastructure and venture capital.

Enough is a fuzzy concept, and everyone will have their own personal definition of what this word means for them. Our experience is that many wealthy families don’t take the time to figure out exactly what this means to them, and how it should in turn impact the decisions they are making in their investment portfolios. If you can define what this word means to you, it can simplify your investment process, help you make sound decisions and allow you to live confidently.

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