Full disclosure – I’ve never actually had anyone admit to me that they have too much money, but as a financial planner I’ve known people who, in my opinion, have more money than they need to live comfortably for the rest of their lives. If your pension income will exceed your expenses, if you have a substantial emergency fund and a fully-funded medical contingency fund, and you have a sizable investment portfolio, you may have more money than you and your spouse will need. But, if you are like most of us, you will sit on that money and worry about running out.
When you reach age 55, it is time to reflect upon your future and determine if your life-long prudent spending and aggressive saving habits have amassed enough wealth to take you (and your spouse) to the finish line. My experience has shown me that people about to retire have either a lot more money than they need or not near enough money for their senior years. Very few people have the “just right” amount. The “more than enough” people never ask me how to spend their money; they want to know how to receive a few more percentage points on a CD. My job is to encourage them to move the focus from a savings plan to a spending plan.
If you want your estate to go to your children, remember you will live until 85 or 90 or beyond. Your kids will be retired by then, and the time will have passed that they can use their inheritance to good advantage. It might be better to distribute some of that money now when it is needed. It might be better to distribute the money in such a way you can actually observe your loved ones using your money to their advantage. This is the best way to “spend” your money. Same principle works for those who want to leave their inheritance to a nonprofit. The nonprofit can better use your money now, rather than wait 20-30 years.
I agree with clients that keeping money in reserve is a good thing; stuff happens. The question is how much to keep? One popular rule of thumb in the financial world is that you can take out 4% of a balanced portfolio (see next paragraph for definition) in year one and then add in the inflation factor each year thereafter. For example: 4% of $1M is $40,000. 3% inflation is $1200 = year two $41,200. There is a high percentage of never running out of money. This 4% money can be taken out and “used.”
Your investment portfolio consists of all your investments. Rental property yes; your home no. Balanced means your money is split between stocks, bonds, cash, real estate, and other. I recommend no more than 50% in stocks, probably less if you are in or nearing retirement. Your portfolio should be rebalanced once a year to keep the percentages in line.
Savers are reluctant to spend. Spending is their biggest hurdle. One way over this hurdle is to apportion a part of your portfolio into various spending “buckets.” If you have a travel bucket, your mindset will change and you will be more likely to enjoy a trip to Europe. An education bucket can provide the incentive to take a college course or try your hand at making pottery. A grandkids bucket might pay for swimming lessons for the little ones.
Step one – compare expenses and income with savings. If it looks like you have too much money, step two is put together a spending plan. Step three – enjoy.