Retirement is a major milestone, and there is something we highly recommend for all of our clients: a fun fund. You work hard, and you should work through retirement with some fun in mind.
After all, what are you working so hard to secure your retirement for if you’re not having fun?
In our most recent podcast, we walk you through a retirement fun fund, how we think about a fund like this when creating an income plan, and our spending plan approach.
Understanding a Spending Plan
A retirement plan has a lot of anxiety because you’ll transition from earning and saving money to spending money. Many of our clients worry about how much they should save, but we like to really dig into the spending part of retirement, which includes:
- Essential income needs
- Legacy or gifting
Essential needs are simple: your bare-bone basics to keep you happy in life. These expenses include mortgage and car payments, utilities, food and all of these related items. You might want to build in insurance payments and anything you truly need to have to live your life.
Wants is a “fun” category because it includes all of the things you want to do now that you’re retired.
However, many people plan for retirement and never think about what they’ll do afterward. The “wants” from retirement often include:
- Traveling. Some clients travel so much during their careers, so the last thing they want to do is travel. Others want to travel because they were tied to a desk during their careers.
- Second Home. Many people want to move closer to their grandchildren and buy a second home or just a vacation home for themselves.
Everyone should sit down and think about their “wants” in their retirement. You might not want to travel or buy a second home, and that’s 100% up to you. However, you should have a plan of what to do during retirement.
Really dream these wants out and think about the costs so that you can add them to your plan.
Finally, legacy planning is a thing you may want to consider. This will include the money that you want for:
- Saving for your grandchild’s education
- Charity purposes
You may not even have a legacy category in your plan, but if it’s something that you would like to do, be sure to add it into the equation. We add these three categories together to create a basic spending plan for retirement.
We recommend adding these categories up and creating a monthly spending plan to see how realistic it is to reach these goals.
How We Calculate a Spending Plan in Our Office
We love helping our clients create their spending plans because we use software for the process. We ask a lot of integral questions, plug variables into the system and it calculates the person’s monthly spending for us.
However, we also add in:
- Inflation on the spending plan
- Inflation on the “wants”
- Maintenance repairs
Once we lay everything out for families, there are normally a lot of bigger items that they want to add to their lists. For example, one client took their entire family on a cruise, and this included a massive number of people.
We even calculate home renovations and more.
Going through all of this, we then decided that it was time for our clients to consider a “fun fund.”
What is a Fun Fund?
A fun fund is a fund that, if you have the means, will allow you to go on a $20,000 – $25,000 trip around the world every other year or remodel a home at $5,000 – $10,000 a year for ten years.
We run a fun fund for 10 years or so, and the impact on retirement is much different than if you used a fun fund for 25 years.
Additionally, we’ve found that in the first 5 – 10 years after retirement, people pack everything they want to do in this small amount of time. Then, after the first ten years or so, they seem to want to settle and enjoy a slower pace of life.
10-Year vs. 30-Year Fun Fund
An infinite fun fund sounds great, and it’s something that may or may not be possible for you, depending on how much you’ve saved in retirement. However, we did want to provide an example here so that you can see the financial difference between a 10-year vs. 30-year fund for someone with $1 million in retirement funds.
- 10 years and left with $700,000 because of fun fund spending
- 30-year may end with $300,000 left at age 90 – 95
In essence, if you go into retirement, there’s no guarantee that you’ll live to 75 or 95. If you know for a fact that you won’t live past 75, you can then have a concrete answer on how much you can spend in retirement before it runs out.
However, if you have a fun fund that is going for 20 – 30 years, you may be shocked and live until you’re 110, but you’ll have very little money – if any – left in your retirement accounts.
Depleting your retirement for 30 years with extravagant vacations and expenditures will leave you with less money to grow and potentially no retirement funds left. For many of our clients, they tend to travel less at 75 – 80, so the 10-year plan works out great for them.
If you create a fun fund for 10 years, we often find it doesn’t tax your retirement too much and allows you to do all of the fun things that you didn’t get to do in retirement.
Creating a fun fund is something that we highly recommend you plan out. Retirement planning needs to work hard for you, and this is where the fun fund really puts everything into perspective.
If you want to have us walk you through a fun fund, click here to schedule a call with us.However, if you’re not thinking about a fun fund yet and want to just get a grasp on retirement and the steps you need to take, click here to start our 4 Steps to Secure Your Retirement Video Course for FREE.