My retirement plan includes lots of golf, travel, and spending time with my family. I have four kids, and because they’re involved in multiple sports and activities, I’m limited to just a few rounds of golf each year. Every day I walk through my garage as I head off to work and see the clubs sitting there in the corner, waiting to be used. Assuming I’m healthy, I hope to play three or four days a week when I retire.
Understanding how you envision your retirement can help with the planning. For example, if you plan to travel extensively, you may need to save significantly more money. In my experience, family vacations and cruises are common for retirees. This could cost an additional $10k, $20k, $30k, and possibly much more per year, depending on your lifestyle. On the other hand, you may find yourself working part-time, which may require you to save less.
Most people don’t think through the qualitative piece of their retirement. I ask, “What does retirement look like for you?” Often, the answer is, “I really don’t know.” In many cases, people are focused on their careers and family life while they’re working, which is normal and expected. However, I’d encourage individuals and/or couples to start thinking about the answer to that question at some point while they’re still working. For example, I have a client who I think wishes he had done more to develop some hobbies and interests during his working years. Work was his only hobby. Now, I find that he’s often bored in retirement.
Maybe you want to drive a bus in the morning. Or volunteer your time for a cause that you’re passionate about. Maybe you’d like to spend time helping your children with their kids.
The key is to make the answer of what retirement looks like for you an integral part of your planning so you can understand how this may impact you financially.
Determining your target number
When you take the time to figure out the qualitative piece, the quantitative piece is easier. We have a number of cash flow and savings tools that can tell you if you’re on track to retire. For example, our accumulation model helps us plan by asking: “How much do you need to spend in retirement?” and “What sources of income do you expect in retirement (Social Security, pension)?”
If you say, “I need $5,000 a month to live, and I need it in ten years because I’d like to retire at age 60,” we’ll help you formulate a plan so that your retirement savings will last another 30 years. Our modeling tool will be able to tell you how much you need to save each month to hit your number, which might be $1 million for retirement.
We use our proprietary Vanguard Capital Markets Model, which does a forward-looking simulation. We plan for scenarios around good markets, bad markets, high inflation, low inflation, etc. Having the right tools to stress-test your portfolio under a variety of market conditions is valuable for peace of mind. If you’re on track, it’s just one less thing to think about.
You’ll also likely need to make adjustments along the way. For example, spending needs may change as you’re saving for retirement. You may have said, “We need $5,000 a month.” Now you realize, “I only need $4,000 a month,” or maybe you need more—$6,000 a month. Based on your changing needs, we’ll monitor your plan and make adjustments, if necessary, to ensure you’re still on track.
Once you determine your target number, then we’ll look at what you’re saving and what accounts you’re using to save. Based on your target, we’ll tell you how much you’re going to need to save to get to your number.
The key with the quantitative piece is understanding that we’re always dealing with some level of uncertainty, whether it’s unknown future portfolio returns, rising health care costs, or the possibility of changes to income taxes or government programs such as Social Security. Having a plan and monitoring changing variables is critical so that you can make adjustments to your plan to ensure a successful retirement. But as long as you keep your eye on the qualitative parts of your retirement plan—what you want to do with your time—you can stay focused on saving what you need.
You often hear the saying, “It’s about the journey, not the destination.” Well, that may be true, but if you don’t have a destination, you’ll never get where you want to go.