Do You Spend More Time Planning Vacation Than Retirement?


Spring break comes up once a year and, as the parent of a college freshman, I realize that my wife and I finally have the freedom to schedule a vacation when we want to!

That may not seem like much, but after having four children, the oldest of which is going to be 30 years old next month; it has been a long time since we actually had that opportunity.

As a financial planner, I work with a lot of individuals and couples. Many of them take annual vacations and I bet they would have trouble disagreeing with me on the following point:

Most people spend more time planning their next vacation than their eventual retirement!

Retirement planning is my specialty. I know that each individual and couple with whom I meet has different lifestyle goals, challenges, assets, risk-tolerances, and health. Because of these differences, I believe that each of these individuals and couples can benefit from a unique retirement plan, tailored to all of the variables mentioned. In order to properly prepare a successful retirement plan, it takes time and a lot of planning.

According to the 2012 Retirement Confidence Survey conducted by the Employee Benefit Research Institute (EBRI), only 42% of Americans have actually calculated how much money they will need to save for retirement.

Here are some key issues to consider before making a decision:

1. Can I afford to retire? No matter how old you are, it’s almost always a good idea to take inventory of your financial assets before one decides to retire. Add up all of the assets you have, including those not targeted for retirement, and then subtract any outstanding debts to give you a rough idea of your total net worth. This list should include your home, car(s), clothes, jewelry, collections, etc. This should be good news and help you realize what resources are available to you if you decide to meet with an advisor to help you prepare a customized plan. Developing a projection of your retirement income stream will help you decide whether or not you can afford to retire.

2. What is your projected retirement lifestyle budget? Think about what you plan to do in retirement. Take the time to identify where you are spending your money today. Then, ask yourself how that is going to change, if at all, after you retire. Do you plan to do more travel? Do you plan to pay off some debt? Once you have a projected retirement budget, then you can use that figure in the retirement analysis. If you don’t do the analysis yourself, there are free online tools available or you can contact a financial advisor to help you project how those expenses will be affected by inflation and taxes.

3. When should you begin drawing Social Security? That depends on how much you have saved, what your retirement budget looks like, and how much risk you want to take in the market. These are some of the items that you can control. Unfortunately, there are a whole bunch of other factors that you can’t control. For example, we have no control of interest rates, the stock market, the bond market, regulations, weather, health, war, terrorism, etc. So, you need to focus on those factors that you can control.

4. How much income can you generate from your retirement assets? Portfolios can be structured to accomplish many different objectives, including defensive (avoid loss of principal), income (focus on interest and dividend income) or growth (ignore short-term volatility). Each of these has a place in a retirement plan, depending on several factors, including your retirement savings, projected retirement budget, risk tolerance, health, and legacy goals. While 4% is a common distribution rule of thumb, you may need more or less, and you may or may not be able to afford this distribution, depending on the factors mentioned. It is best to have a professional perform an analysis of your needs in order to provide you with a distribution rate that best protects your assets and supports your long-term retirement goals.

5. How much risk should you be taking? Typically, I have found that clients are unsure of how much risk they need to take. In some cases, they don’t even understand how that relates to a targeted portfolio return. Most clients relate their returns to the S&P 500 or the Dow Jones Industrial Average (DJIA), as opposed to a specific long-term goal. They look at whether they are better or worse than the individual markets. The S&P 500 tracks the price of the 500 largest US corporations and the DJIA tracks the 30 largest US corporations. In most cases, these indexes have little or no correlation to a client’s portfolio. One of the key outcomes of my retirement analysis is to show clients the minimal targeted return on their retirement assets that will support their desired retirement lifestyle. This is a very important piece of knowledge. Once my clients know that percentage return, they can better select an allocation that minimizes the amount of risk they need to take in order to be financially successful in retirement.

6. What are the most appropriate investment strategies for your retirement assets? Investment strategy ought to be born from risk management. While there have been many studies that support the belief that portfolio returns are more dependent on asset allocation (percentage of portfolio in stock vs. bond vs. other investments) than on individual holdings, including the Determinants of Portfolio Performance by Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower, there have been even more white papers published that disagree with that belief, including The Asset Allocation Hoax By William Jahnke. No matter which side you are on, it is clear that the balance between stock, bond and other is an important consideration, as is the specific investment vehicle(s) used to make the investment. So, whether you are a do-it-yourselfer or you work with a financial advisor, I believe that it is critical that you start with the risk profile that model. One advantage of working with an advisor is being able to have them help you identify how much risk you need to be exposed in order to accomplish your long-term investment goals.

7. What will you do in retirement? Some people are so focused on their daily jobs working up to retirement, they literally run right up to the point of making the retirement decision before they realize that they have not really thought about what they are going to do in retirement. This can be a real problem. Active people become restless or frustrated when they don’t have anything to do. I strongly suggest looking—well before a desired retirement date—into volunteer work, part-time jobs, and consulting are common choices. From my perspective, I have found those that do the best in retirement have a plan to stay active, physically as well as intellectually. Spending time doing what you want to do can be very healthy. Whether it is a new hobby or volunteering for a cause in which you feel very passionate, having a reason to get up in the morning is critical to long-term health and satisfaction in retirement. According to a recent Employee Benefit Research Institute (EBRI) study, it appears that the link between people that die shortly after retirement may be linked to inactivity. Your body and mind need to be active. Don’t turn them off just because you have retired.

According to the Employee Benefit Research Institute (EBRI) study, it showed that people who calculate how much savings they will need are more confident about their ability to retire.

As with other aspects of your life, like your vacation, doing proper planning significantly increases satisfaction with the outcome. If you haven’t spent the time you should have on your financial plan, contact Szarka Financial to set up an appointment to discuss your long-term financial needs.