The Relativity of Wealth and Poverty

How do you know if you’re wealthy? How do you know if you’re poor? It’s all relative. (Please stay with me a minute, because this does relate to retirement planning.)

Let’s start with wealthy. Are you wealthy if you have (A) $1 million? (B) $10 million? (C) One billion dollars? My answer is “(D) None of the above.” Like Humpty Dumpty, I am going to exercise my privilege of defining the words I use the way I want to define them. And I choose to define “wealthy” with a functional definition: A person is wealthy if he has so much money that during his (and his spouse’s) lifetime he can’t reasonably expect to productively spend it all on his own pleasure. He’s forced to give it away (to his kids, his favorite charities) either during his lifetime or at death. That’s wealthy.

“Wait a minute,” you say, “you’ve snuck in a word there. What do you mean by ‘productively’”? Humpty Dumpty returns. By “productively” I mean you wouldn’t get any meaningful pleasure out of increasing your consumption. You’re spending lavishly enough, to the point where you’d rather give it away than spend more on yourself. That’s wealthy. By this definition, few people are wealthy; most of us can find pleasure in ratcheting up our lifestyles. There's always gold-plated faucets and such. But those who are wealthy can be found in all economic strata, from CEOs and hedge fund managers to teachers and bakers.

What about poverty? What is your personal poverty level? Again, like wealth, it’s relative. I define your personal poverty level (as Humpty Dumpty tells me I may) as that spending level that would make you so miserable, you would not voluntarily take any measurable risk of dropping below it.

Here’s a f’rinstance. Remember Ernie from yesterday’s post. He earns $100,000 per year, of which he spends $86,000 per year. Let’s say Ernie’s financial planner tells him that at his savings rate, his likely available retirement spending is $86,000. Ernie’s pretty happy with that, since that’s his current standard of living. But imagine that his financial planner goes on to say that while that’s his likely future retirement spending, there’s a meaningful possibility it will be $76,000. Now Ernie has to think about that. How bad would that be? What little luxuries would he have to give up? Maybe he could deal with that. What if it were $66,000? $56,000? $46,000? At what level would Ernie step up and say, “Whoa! That’s too low. I can’t stand that risk. I’m willing to ratchet down my spending today to shrink that meaningful risk of having to live below that level tomorrow.” That’s Ernie’s personal poverty line. And it’s different for everyone, depending on the lifestyle they have become accustomed to, and the depth of their commitment to that standard of living.

It would be useful to have a sense of your own personal levels of wealth and poverty. Not, of course with precision—just a rough idea. Because knowing the boundaries of what you must have and what you can’t use will help you settle on what risks you can’t afford to take.