Then there was Natalie Merchant. When I was living in New York in my twenties, just starting out and sharing a tiny apartment with a roommate, he and I used to listen to Tigerlily, Merchant’s 1995 debut solo album. I loved that album. And I knew that the former 10,000 Maniacs singer’s mellow lyrical style would set the perfect mood for one special evening and that it would be a hit with everyone from my mom to the guys I’d grown up with in Jersey City. So I arranged through Merchant’s reps to bring her down to the island for a private concert, telling my guests only that we’d have a surprise guest.

  The night of the private concert was as wonderful as you can imagine. I remember holding my wife from behind and just listening to the music and to Merchant telling the story of how she had composed one of the songs, and I also remember drinking champagne like crazy. It was a pleasure seeing my mom chatting with the great singer, too. But it wasn’t just that concert that was incredible—I would never change anything about that trip.

  Picture it: You’re walking down from your room to the beautiful beach on a crystal-clear day, with gentle waves rolling in, and wherever you look, all you see are your loved ones. You see your best friend from college, and then you walk some more and you glimpse your best friend from your working years. Your mom is coming out of her cabana. You see other close friends on their deck or by the pool, and everyone is in awe of the beauty all around. And everyone is happy! Trust me, sharing that common experience is just the best feeling ever. At some point I actually had the thought This might just be what heaven looks like. That feeling came to me again and again. The whole week was awesome in every way and I’ll never forget it, not until my brain stops working.

  To this day, the people in my life are still talking about that week, and every so often some little thing happens that reminds me of that wonderful party—and all those glorious feelings come rushing back again. Reliving those days and nights in my mind feels almost as good as actually being there. At the end of my life, I am convinced, my joy will come from my memories—and that trip to St. Barts will be right near the top of the list.

  That’s why I have absolutely no regrets about the insane amount of money I spent on that one week—nor the fact that I didn’t wait until my 50th birthday to have the party of a lifetime. In fact, by the time my 50th rolled around, my dad had died, and my mom’s health had, unfortunately, declined substantially. My brother and two sisters were there, but some of my friends couldn’t make it this time. From my perspective, it had been a very good decision to splurge on that extraordinary gathering five years earlier.

  Or . . . I could have not splurged on that lavish party when I was 45. Instead I could have celebrated my birthday by just looking at my monthly investment savings and IRA statements. But what kind of memory would that be?

  Look, many of us are inclined to delay gratification and save for the future. And the ability to delay gratification serves us well. Being able to get to work on time, paying everyday bills, taking care of our kids, putting food on the table—these are the essentials in life. But actually delaying gratification is helpful only to a point. If you have your nose to the grindstone too much every day, you run the risk of waking up one morning and realizing that you may have delayed too much. And, at the extreme, indefinitely delayed gratification means no gratification. So at what point is it better not to delay?

  Well, there are a couple of ways to answer that question. One is year to year, as chapter 6, “Balance Your Life,” showed: Throughout your life you have to balance your spending on the present with your saving for the future. The optimal balance shifts from year to year because your health and income are likely to change each year.

  The other way to answer the question of optimal balance is by looking at your lifetime savings as a whole, and how to do that is the focus of this chapter. Now, this is not how most people think about spending and saving, so let me explain what I mean.

  First of all, think about everything you own right now, from your house to your baseball card collection, from the value of your investments in the stock market to the cash in your wallet. These are your total assets. If you have any debt, such as student loans, a mortgage, or car loans, then total up all those loans and subtract that amount from your total assets. What you’re left with is your net worth: what you own minus what you owe. Sounds familiar, right? Net worth is a basic concept, and it’s one we touched on earlier when we looked at data showing that Americans’ median net worth tends to rise with age. If you understood that discussion, you already understand the next important point, which is that a person’s net worth isn’t the same throughout their life.

  That’s a key point to understanding the peak: your net worth tends to change over your lifetime. That’s just how it is for most people. For a good chunk of your life, especially when you are starting out, you are simply spending the money that you are currently earning. At that early stage of your life, you are not increasing your net worth: If you’re living in a rented apartment, carrying a lot of student loan debt, and not yet earning enough to pay off that debt, you have a negative net worth, because you owe more than you own.

  But as you chip away at those student loans—and assuming your income rises faster than your spending—you typically start to save money, which means your net worth can start to grow from negative to positive. And it becomes more and more positive over time: If you stay gainfully employed, your net worth generally keeps rising, regardless of whether the rise is slow or fast. I’m not saying that’s how it should be—that’s just how it usually is. Let’s say your net worth at age 25 is $2,000, and then your net worth at age 30 is $10,000. By age 35 it will most likely be some number higher than $10,000—and it will typically be higher than that at 40, and higher still at 45. The statistics on household net worth (by age of head of household) bear out this trend.

  Or look at the rates of homeownership, since owning your own home is a common way to build wealth. (You might not think of your home in the same way as you do about money in the bank, but there’s no denying that owning a house adds to your net worth.) Whereas only about 35 percent of Americans under 35 own their own place, the homeownership rate for Americans aged 35–44 is nearly 60 percent, and it is nearly 70 percent for Americans in the 45–54 age bracket. It’s even higher as people get older.

  But these basic statistics describe only what people are currently doing about their net worth, not what they should be doing if their goal is to maximize their lifetime enjoyment. So what should you be doing?

  This is where my advice diverges from what most people do: You should find that one special point in your life when your net worth is the highest it will ever be. I call that point your net worth peak, or just “your peak.”

  Why should there ever be a peak—why can’t your net worth just keep going up? First, remember that, from my perspective, your overarching goal is to maximize your lifetime fulfillment—to convert your life energy to as many experience points as you can. Doing that requires figuring out the optimal allocation of your money and free time to the right ages, given the inevitability of declining health and eventual death. As a result, some years you need to save very little money (so that you can spend more on your meaningful life experiences), while other years you should save more money (so that you will have more money to enjoy more, or better, experiences later).

  But there’s an even more important reason for a net worth peak: your goal is to die with zero. If your net worth keeps climbing, rising from your sixties to your seventies and beyond, then there is no way you will die with zero. So, at some point you must actually start dipping into your lifetime savings; if you don’t, you will end up with unspent money, which means you haven’t acquired as many experience points as you could have. That is why I say your net worth reaches a level at which it is the highest it should ever be—after which you must start spending it down on experiences while you can still extract a lot of enjoyment from those experiences. That point, in effect, is your peak.

  You can’t leave the timing of the peak to chance—to get the most out of your money and your life, you must deliberately determine the date of your peak. Later in this chapter I will give you some guidance on how to know and pinpoint that date.

  But Will You Have Enough to Live On?

  Before you start thinking about spending down your money, you must make sure you have enough to live on for the rest of your life. That’s an important caveat, because plenty of people aren’t saving enough for retirement. Although I want to urge everyone to maximize their experiences, I don’t want to encourage irresponsible spending. Thinking of your peak as a date—and not as a number—is good advice only for people who have reached a certain savings threshold.

  Even then, bear in mind that I am basing these recommendations on my own modeling of what makes for a fulfilling life; I am not a financial adviser, and if I inspire you to think differently about how to manage your money, it’s a good idea for you to first work out the details of your personal situation with a professional, such as a certified financial planner or accountant.

  With that disclaimer in place, let me explain how I approach and think about the savings threshold. The threshold I’m talking about—how much you need to save at a bare minimum—is a number. But as you’ll see in a moment, that number may well be lower than what dutiful savers are already on track to save. That’s because the threshold is based on avoiding the worst-case scenario (that is, running out of money before you die); it’s the amount of money you need to have saved up just to survive without any other income. Once you meet this threshold, you don’t need to work for money—and you can start carefully dipping into your savings.

  So what is that threshold? Well, it’s not the same number for everybody, because the cost of living varies based upon where you live, among other factors. And if you’re supporting people other than yourself, you obviously will need more savings than if you are a family of one. But for everybody, the survival threshold is based on both your annual cost of living and the number of years you expect to live from the present day.

  Let’s look at an example. Let’s assume your annual cost of survival is $12,000. That’s admittedly really low. But I am using this example not to tell you specifically how much you will need but just to give you a feel for how the basic calculation works.

  Let’s also assume for this example that you are 55 years old and that, having looked at a life expectancy calculator, you expect to live until you’re 80. So your money will have to last you another 25 years (that is, years left to live = 25). How much do you need in your nest egg today to have a survival amount for the rest of your life?

  Well, to get a very rough answer—not the final answer—you would just multiply your annual cost of survival, the cost to live one year, by the number of years you’ll be spending that amount, years left to live:

  (cost to live one year) × (years left to live) = $12,000 × 25 = $300,000

  Again, this is not the final answer. The real amount you need to save up is actually much lower than $300,000. Why? Because your nest egg doesn’t just sit there while you dip into it year after year. Assuming you’ve invested it in a typical stock/bond portfolio, your money is usually earning interest, working to bring in income even when you are no longer working. Therefore, whatever interest it’s earning above inflation (whether that interest is 2 percent or 5 percent or whatever) is helping to offset the cost of your withdrawals.

  Time for another disclaimer: Always bear in mind that even a stock/bond portfolio does not always earn interest above inflation. Rates of return can vary from year to year, sometimes by quite a bit.

  For the sake of this example, though, let’s assume an interest rate of 3 percent above inflation. And let’s extend the example to take that 3-percent-above-inflation interest into account.

  Suppose you start with $212,000 in savings and you spend $12,000 your first year. How much do you end up with after the first year? Well, you don’t end up with just $200,000. Instead you end up with closer to $206,000, because even if you withdrew the entire $12,000 at the beginning of the year (such that the first $12,000 earns you no interest), the 3 percent you earn on the remaining $200,000 earns you a full $6,000. You can extend this process out for the same annual withdrawals and the same annual interest for the full 25 years.

  This fixed annual withdrawal is an annuity (much like the annuities you can buy from an insurance company), and there’s a technical formula (called the present value formula for an annuity) for calculating how much you’d need to start with to generate a given annuity. If you were to plug these numbers into that formula, you would find that the initial $212,000 will last you nearly until the end. (To be precise, you need to start with $213,210.12 if you want your money to last 25 years at 3 percent interest and a $12,000 annual withdrawal.) With each withdrawal, your initial amount does shrink—it just doesn’t shrink as much as you might think, because the interest earns you back part of what you need. This is why you need only a portion of the annual cost of survival times the number of years: Interest will earn you the rest.

  So what is that fraction? As a simple rule of thumb, I suggest 70 percent. In our example above, the fraction is actually just over 71 percent (because $213,210.12 is 0.7107 times $300,000). If the interest rate were higher, the fraction you’d need in savings would be lower. For example, if your interest rate is 5 percent, and everything else remains the same, you need only $173,426.50—or a little less than 58 percent. And, of course, if the interest rate is zero, you’d need all of the money (the full $300,000) to come from savings alone. But 70 percent covers you in most cases, and it’s a nice, simple number.

  So let’s capture all of this in one basic formula for calculating your survival threshold:

  survival threshold = 0.7 × (cost to live one year) × (years left to live)

  You can play around with different values of cost to live one year and years left to live. For example, if you want to retire in Florida, you can do some research to see what that would cost each year. And, of course, you can plug in a higher or lower number of years, too, and see the effect of these changes on your survival threshold.

  Again, keep in mind that this survival threshold is the bare minimum. Once you’ve met that survival threshold, you probably won’t want to retire just yet—it still might make sense for you to keep working to earn money for a higher quality of life than the basic survival threshold can provide. But now you can safely start thinking about at least the possibility of cracking open your nest egg. Once you’ve taken care of your worries about mere survival, you can then start thinking about your net worth peak as a date rather than a number.

  Keep in mind, too, that you can use multiple sources of assets toward reaching your survival threshold. That is, if you have equity in your house, you can decide to downsize and sell the house—or, if you’d prefer to stay in your current home, you can take out a reverse mortgage, one way to tap into the value of your property. If you’re unsure how many years the money must last you or are worried about running out, remember that you can take all or part of your savings to buy an annuity.

  Knowing Your Peak: It’s a Date, Not a Number

  Okay, let’s say you have met your survival threshold and then some. Now you can afford to think of about when to break open your nest egg for maximum lifetime fulfillment. Again, when you think of your net worth peak this way, the peak is not a number (a specific dollar amount) but a specific date (tied to your biological age). Those are two very different ways of thinking about your financial goals.

  Many of us have been trained to think that our plan for drawing down our savings should be framed in terms of numbers—that is, that once we reach a certain amount in savings, we can then retire and start living off those savings. And there’s no shortage of suggestions about what that number should be. The most simplistic advice, which can’t possibly be right, is for everyone to aim for a single number, such as $1 million or $1.5 million, no matter who you are or where you live. (How can $1 million in savings be the right number for both the healthy, world-traveling person living in San Francisco and the quiet homebody living in, say, Omaha?) No real retirement expert would suggest a one-size-fits-all number.

  Instead, these experts give more personalized advice—basing the recommended number on your actual cost of living, your life expectancy, and projected interest rates (such as a typical annual 4.5 percent rate of return after inflation). Some advisers even take into account the fact that your retirement spending won’t be constant from the start of retirement until its end—thus they tell you that you will need more money at the start of retirement (your go-go years) than when you’re 10 or 20 years in. So there are definitely various degrees of sophistication in all this retirement-planning advice. But what all this financial advice has in common is the idea of coming up with a single number—one financial target to shoot for and hit before you can safely start to draw down your savings.

  For those people who haven’t saved enough to live on in retirement—either because their income is too low or because they’ve been too much of a grasshopper—the focus on reaching a financial target does make sense. Without such a pinpointed target in mind, people who haven’t saved enough clearly risk ending up living out everyone’s worst-case scenario: running out of money and then being too old to go back to work.

  But a number should not be most people’s main goal. One reason is that, psychologically, no number will ever feel like enough. For example, let’s say the number you come up with (based on calculations like the kind financial advisers recommend) is $2 million. To reach that goal, you can easily justify working longer by telling and convincing yourself that you will be able to enjoy an even higher quality of life if you save up $2.5 million. And by that logic, you can provide for an even higher quality of life by saving $3 million. So where does it end? That’s one problem with a numerical target. To try to keep up with this moving target, you just keep working on autopilot and end up postponing the best experiences of your life.