By Scott Keffer
How much is enough? Just a little more, right? But, is there a limit? J. Paul Getty, the American business executive who earned his first million by age 23 and died in 1976 with a multibillion-dollar fortune, said, “If you can actually count your money, then you are not really a rich man.” And when you have more than enough, what do you do with the surplus?
But determining if you have a surplus is not always easy. It would be a great feeling, though, to know that you had more than enough, wouldn’t it? It would be peace of mind.
As you know, this is not just a financial decision, but also an emotional one. Our personalities, our family dynamics and our early experience with money are as important as the financial calculations. Those who lived during the Great Depression have vivid memories of the economic collapse and the financial havoc it created for many. Memories that impact their thinking. Memories that stir fears: “Can we ever have enough?”
You need to quantify “financial independence.” After you stop working for a living, everything must come from your stockpile: your taxes, lifestyle, charitable giving and any lifetime inheritance to your heirs. So, for many, it’s difficult to say how much is enough. Often, it’s because they think in terms of total amounts, not specific desires.
Try this: think about your specific desires in terms of different buckets: Income Bucket, Possessions Bucket, Emergency Bucket, Investment Opportunity Bucket, Business Opportunity Bucket and Education Bucket. How much after-tax income would you need today to feel independent? How much would you like to have in possessions—homes, personal property, etc.? Then answer the questions, How many? and How much? How many emergencies, opportunities and educations would you like to take care of and how much for each one. Lastly, are there any unique buckets you’d like to have?
Then, have someone run some cash flow projections for you. You will need to determine what are appropriate assumptions for earnings and inflation. Here are some guidelines for the last 10 years, 20 years and 35 years (Source: Chase Global Data & Research):
• S&P 500: 18.0 percent, 16.5 percent, 12.1 percent.
• U.S. 10-Year Treasury Bond: 7.3 percent, 9.0 percent, 7.7 percent.
• U.S. 3-Month Treasury Bills: 5.6 percent, 7.5 percent, 6.6 percent.
• Inflation: 3.4 percent, 4.9 percent, 4.9 percent.
You need to decide what you feel is appropriate for the future. You will probably want to use a blended earnings rate, but try different rates and see what happens to the numbers. This will give you ranges for each bucket and a range for your financial independence.
Once you have determined how much is enough, you must ensure that your wealth is protected against financial independence predators. There are many predators: economic, tax, life’s uncertainties and bad decisions, both yours and others. Financial independence requires that you not only have enough, but that you retain control of it. And control means a strategy that provides maximum protection, as well as accessibility.
Next, how much is enough for your children? Bill Gates said, “One thing’s for sure, I won’t give my heirs a lot of money because I know it wouldn’t be good for them.” I know what you’re thinking; a little bit of Gate’s wealth is a lot of money. I like Warren Buffet’s perspective best: “I want to give my kids enough so that they could feel that they could do anything, but not so much that they could do nothing.” I think that means enough to give them an edge in life, but not so much that you take away the edge.
This area is also emotional, as well as a financial. How do I ensure that my wealth is an incentive to productive living and not a disincentive? You must sit down and think about the kind of lifestyle that you would like your children to have. Again, think in terms of specific desires: income supplement, education, special needs, business opportunity fund, etc. Remember that every child is different in personality, personal situation and financial acumen. As a result, it can be okay to treat them differently.
Once you’ve identified how much is enough for you and your heirs, you can begin to ask yourself, What do I do with the surplus, keep it, give it to my children or give it away? Many people would gladly give more to their children and more to charity, if only they knew that they had a surplus. If the answer is more to your children, follow the thinking you’ve outlined in the step above.
If the answer is charity, you can give and still impact your children by using family-controlled charitable entities, like Family Foundations. These entities can be great tools to prepare your heirs for their inheritance and inoculate them from that dreaded disease, affluenza. Charles Simmons said, “Wealth is a dangerous inheritance, unless the inheritor is trained to active benevolence.” Through family-controlled charitable entities, you can help your children and make the kind of difference in your community that you always dreamed of making.
Find out if you have enough for you. If so, you can have peace of mind. Then use your surplus to make a difference for your heirs and your community. Take a moment and dream about the influence you can have.
Imagine: peace of mind, an appropriate inheritance for your children and influence in your community. Sounds like enough to me.
Scott Keffer is president and founder of Wealth Transfer Solutions, Inc., a legacy planning company in Pittsburgh.