“What’s money if you can’t spend it?”
Growing up, I remember this joke my father always made to my mother when he wanted to buy a new “toy,” like a soft top Jeep Wrangler for cruising around or a new riding lawnmower with lots of horsepower. But Mom controlled the purse strings in our house. She was definitely the frugal one and held the reins tightly on the family budget.
While this line drove my mom crazy years ago, she’s definitely patting herself on the back now. She managed the family’s money quite well, and as a result, my parents have plenty of money to spend on unique experiences now that they are retired.
One of their unique experiences is to travel to a different country every year to ring in the New Year. This past December, they traveled to Iceland, and in a few months they plan to be in Wales in the United Kingdom to welcome 2019. Traveling creates memories for the two of them that are invaluable.
To make certain they can afford their annual New Year’s travels, Mom and Dad take a number of steps that reduce their expenses and even provide a small income. They only replace their cars every 10 years. They also decided to live modestly; living in the same house they built in 1970 for $30,000. I remember them celebrating the payoff of their mortgage when I was in high school, 25 years ago.
Both former schoolteachers, my parents also decided to get part-time jobs early in retirement to pay for groceries and other daily expenses. My mom dressed in colonial attire a few days a week to give tours at the local Revolutionary War museum, while Dad fired a starting pistol at high school track and field events. This extra income allows them to keep their investment portfolio growing, instead of withdrawing these funds to pay for everyday needs.
Several of my clients have told me about their dreams for retirement: a luxury vacation with their adult children and grandchildren; photography classes and special equipment they’d like to upgrade; or a new swimming pool with professional landscaping to create a true backyard retreat.
Of course, each of these dreams carries a hefty price tag. While some people can easily afford to cut a check, some feel guilty or selfish about spending the money. It can feel wasteful, and they fear such a large expense means they’ll need to sacrifice down the road.
So how do you know if it’s OK to create your grand experiences?
First, Create a Budget
I know, budgets aren’t fun, but retired couples must know how much money they’ll need over the next 20 to 30 years. One method is the 4% principle. Take the amount of money you expect to draw out of your portfolio each year, including taxes, and divide that by 4%. That gives you a reasonable value for the nest egg you need when you retire. For example, if you plan to withdraw $100,000 annually, you’ll need to have accumulated $2,500,000 in a well-diversified portfolio for retirement.
If there is any extra money, these leftover funds can be used for their fun times.
Another option couples can try is to look at their monthly expenditures to see if there is any wiggle room for cuts. Determine how much money can be trimmed from the everyday budget to pay for extras and still cover basic expenses. For example, do you need two cars, or will one suffice, especially if you do most of your leisure activities together? Should you plan lunch dates with friends rather than dinners out, which tend to have a heftier price tag? These are two examples of ways to trim monthly expenses that may not be obvious.
Allot Plenty of Time to Pay for Your Big Expense
For example, if you are planning a one-week European cruise, it may be one year or more before you can find a date that works for everyone in your group. This provides plenty to time to plan financially. And just having the experience on the calendar will give you an immediate boost of excitement!
For those people still working and saving for retirement, consider how much these “experience” expenses will set you back. Perhaps it’s a matter of saving just a little more of an annual bonus each year to allow you to take those grand vacations every two or three years. For those who want to install that backyard paradise, it may mean working another year or two if you are spending some of your retirement savings early.
Pay for Your Splurge Experience with Cash
Finally, when paying for these “experiences,” try hard to minimize borrowing and taking on new debt. The last outcome anyone wants is for these wonderful memories to create stress and derail any long-term financial plans.
People who have a financial adviser should let them know about the experiences they are hoping to create, and ask the adviser to develop a financial plan to pay for them. Most advisers want to be creative and figure a way to help you achieve your goals!
The lyrics by 1980s rock band 10,000 Maniacs sum up best the meaning of creating these experiences. “These are the days you’ll remember … and as you’ll feel it, you’ll know it’s true, that you are blessed and lucky.”
Don’t be afraid to create the experiences for yourself and your loved ones to enjoy. Just make sure you have a reasonable budget and reasonable time frame to pay for the experiences. You won’t regret it.
Lisa Brown, CFP®, CIMA®, is author of "Girl Talk, Money Talk, The Smart Girl's Guide to Money After College” and “Girl Talk, Money Talk II, Financially Fit and Fabulous in Your 40s and 50s". She is the Practice Area Leader for corporate professionals and executives at wealth management firm CI Brightworth (opens in new tab) in Atlanta. Advising busy corporate executives on their finances for nearly 20 years has been her passion inside the office. Outside the office she's an avid runner, cyclist and supporter of charitable causes focused on homeless children and their families.
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