What Matters Most

PABLO PICASSO WAS ONE of the most influential, prolific and financially successful artists of the 20th century. Yet, if you had visited his studio at the peak of his career, you might have guessed otherwise: It was a mess and his work schedule was, at best, leisurely.

On a normal day, Picasso would stay in bed all morning and only get to work around 2 p.m. When he did work, according to a biographer, he was surrounded by “piles of miscellaneous junk” and an array of animals. In addition to cats and dogs, a miniature monkey named Monina would sit on the artist’s shoulder, stealing his food and smoking his cigarettes.

Why am I talking about Picasso and his odd routine? It holds an important lesson for your personal finances. However unusual Picasso’s routine, the key point is that he did indeed have a routine and, because of that, nothing else really mattered. Presumably, Picasso knew how many hours were required to get done what he needed to get done. As a result, if he spent the rest of the day relaxing, it didn’t matter. The mess, the cats, the dogs, Monina—all that was irrelevant.

How does this apply to your finances? Often, folks will ask if I think they’re spending too much in one particular area. Perhaps it’s a seven-figure house, a six-figure car or some other luxury. My response is always the same: If you have a sound underlying structure to your financial routine, then—like Picasso—you don’t need to worry too much about everything else.

In practice, what does this look like? What do I mean by a sound underlying structure?

If you’re in your working years, the most important thing is to have a savings plan that’ll meet your retirement goals and then reliably sock away that sum each year. While life is full of unknowns, there’s a fairly simple formula to calculate that savings number.

If you have access to a spreadsheet, such as Excel or Google Sheets, use the PMT function. Let’s say you currently have \$250,000 saved and expect 5% annual investment returns. If you want to accumulate \$1 million by the time you retire in 20 years, this is the formula to determine your annual savings goal:

=PMT(5%,20,-250000,1000000)

If you don’t have a spreadsheet handy, the answer is about \$10,000 per year. While nothing is guaranteed, odds are that if you routinely save \$10,000 a year, you’ll reach your goal.

This is where Picasso comes in: As long as you maintain that savings routine, nothing else really matters. If you want to buy that expensive car or send your children to a high-priced school, the only litmus test for whether you can “afford it” is to ask whether it would impact your ability to continue saving that \$10,000 a year. Or, to put it another way, you could afford a lot of disarray in your finances, as long as you maintain this one piece of structure.

If you’re already retired, you can also apply Picasso’s approach. Here the math is a little different: You want to calculate the amount you could safely withdraw from your savings each year and still maintain your standard of living throughout retirement.

There’s a number of approaches you could use to estimate this number, including using a spreadsheet or simply adopting a 4% withdrawal rate. But the important point is this: You want to establish a withdrawal routine that’s sustainable. In other words, you want to structure a withdrawal routine that, in all likelihood, won’t result in you outliving your money. And then you need to stick to it. While it sounds like I’m stating the obvious, that last part is key.

If there’s one thing that seems to trip people up, it’s “one time” expenses. Everyone has these—a vacation, a new roof, a big tax bill—and often they’re hard to predict. But when designing a retirement withdrawal routine, you need to allow for them in your calculations. That may sound like a tedious task. But if you do that, you’ll likely sleep easier—and you may discover that your finances permit more spending than you expected.

Adam M. Grossman’s previous articles include Happy CompromisesPushing PricesCounting Down and Deadly Serious. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.