Ep. 183 – Having a Fun Fund in Retirement

Have you ever thought about incorporating a fun fund into your retirement spending plan? How realistic is it to do the fun things you want to do and for the time you want to do them after retirement?

A fun fund is an extra fund that’s added to your retirement spending fund categories as part of your basic wants after retirement.

In this episode of the Secure Your Retirement podcast, we talk about the categories of retirement spending and the importance of having a fun fund. Listen in to learn why it’s important not to overstate certain things in your retirement plan to avoid a snowball effect.

In this episode, find out:

  • Three simple categories of a retirement plan; essential income needs, wants, and legacy/gifting.
  • Essential income needs – the basic things you need to stay relatively happy.
  • The wants – the things you want out of retirement.
  • The legacy/gifting – allocating some funds to give away if you can.
  • How we analyze retirement spending and inflate the basic wants.
  • The fun fund – an extra fund from your retirement spending plan to support fun activities.
  • The difference between a fun fund running for 10 years and that running until the end of life.

Tweetable Quotes:

  • “Running a fun fund does not tax your overall retirement plan that much.”– Radon Stancil
  • “We take essential income needs, wants, and legacy/gifting together and they work really well to create a spending plan for retirement.”– Murs Tariq


If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Here’s the full transcript:

Radon Stancil:Welcome, everyone, to our Secure Your Retirement podcast. Today we have a fun topic, and that is what it means to have a fun fund in retirement. So I’m saying fun, F-U-N, fund, F-U-N-D, in retirement. And you might think, “Why do we need a fun fund, or isn’t all the money we have be a part of a fun fund?” Well, you’re going to learn how we think about it when we are building out an income plan. I also talk about this all the time with potential clients and clients.
You’ll hear Murs and I talk a lot about income planning and a spending plan. We do not like using the word budget. It’s like an ugly word. Why? Because a budget kind of makes people feel that they are restricted and they have rules that say what they are not able to spend over. And so that just gives a negative connotation. But a spending plan has a whole different feel to it because in a spending plan it says, “Hey, what can I spend? Here’s my plan for spending.” And so it feels much more free, if you want to say it.
But there are some different layers of how we build out a spending plan and it has really three major categories. And so Murs, can you walk us through the three major categories and then we’ll just kind of talk a little bit about what each of those mean.
Murs Tariq:Yeah, I think the big thing to understand when it comes to building out these retirement plans and planning for income in retirement is there’s a lot of anxiety around this shift going from earning and saving to now spending what you’ve earned and saved all your life. And we always get the question that’s asked is, how much should I have saved for retirement? And we’re never going to downplay saving for retirement, but we do want to up play in understanding how much we are going to be spending in retirement. And we like to make that pretty simple into three simple categories that I think everyone can really grasp on and understand. And that’s basically your essential income needs, your wants, and then your legacy or your gifting categories.
So your essential income needs, it’s pretty much what you need to keep the lights on, stay fed, stay what I call relatively happy. So just the bare bones basics that’s going to take care of the day-to-day every single day on a monthly basis. And so think about what those numbers are. Maybe you still have a mortgage, maybe you still have a car payment, your utilities, regular grocery runs and stuff like that. And you add that up. And that’s kind of what your essential income needs are. Also, maybe some of the ones that you want to build in are things that aren’t monthly, but maybe they’re an annual thing, like insurance that come into play in larger chunks. You want to build that into what that costs on a monthly type of basis. And so start thinking about those things that you can’t live without, that you absolutely need. That’s what your essential income needs are.
And then we get into the wants. And this is a category that’s supposed to be fun. It’s supposed to be things that you want. And I talk about all the time that we work so hard before we get to retirement just to get to retirement. And a lot of times we don’t think about what we actually want to be doing in retirement. So if you’re listening to this now and you’re still working, you’re close to that idea, that concept of retirement that’s been built up in our heads for so long as this beautiful magical thing, I encourage you to start thinking about what do you want out of retirement and have that answer before you actually get to retirement. So now we can start planning for it.
And those wants are, for some families it’s travel. I tell the story of one family whose job and their career had them traveling so much for their job that they don’t want to travel anymore. All they want to do is sit at home and spoil the kids and grandkids. So maybe that’s their want. You’ve got another family over here that their job and their career kept them tied to a desk for so long that they really couldn’t travel. And so all they want to do is travel for the next 10 years while they still feel like they’re going to be willing and able to do that.
Then you have families that want to do something completely different. Maybe it’s buying a second home, or maybe it’s having a membership to, say, a golf membership that they didn’t have time for while they were working. Whatever it is, we want you to think about it and dream it out and understand what the cost of that is. Not just think about, “Hey, I want to do this.” Try to understand what is going to be on a regular basis so that we can build it into some type of monthly spending plan.
And then the last piece is going to be the legacy or gifting category of spending. Not all families have this. It’s really up to what your goals are, what your desires are. It could be this is what you could use to say, “Well, I want to help plan for my grandkids’ college education. So I want to allocate a certain amount of money towards that on an annual basis or a monthly basis.” Maybe you’re contributing. We have plenty of clients that contribute to 529s on behalf of their grandkids. Maybe you just want to give money away to charity on a monthly or an annual basis. So whatever that is, just be thinking about that and so that we can allocate it in. So we take those three together, essential income needs, wants, and then legacy and gifting. We take those three categories together and they work really well together to create a spending plan for retirement.
Radon Stancil:All right, so the way this would normally work in a situation where we were sitting with somebody, we use a program that analyzes our retirement spending. We go through every layer that Murs just talked about. So we have all that laid out. Typically, what we will do on the spending part of the plan that’s the essential needs for sure, we are going to put inflation on that. Inflation’s a big topic. When it comes to the wants, most of the time we’re going to put inflation on the wants because the wants are yours, I’m going to say it this way, your basic wants.
So a person says, “Hey, I want to be able to know that I could travel to go see the grandkids or I want to go on vacation.” But these are not elaborate vacations. These are just your normal, I’d like to go places. It’s normal, I’m going to have to replace the car every five, 10 years. It’s normal, I’ve got to fix it an air conditioner kind of thing. That’s in my wants. And those are the things that I’m going to have there. So we usually will inflate that.
The legacy is kind of more of a plan of like maybe I’ve got an annual amount, so we necessarily don’t have to inflate that part. But we’ll lay all that out many times and we’ll be sitting there with a family, and they’ll look at it and we’ll start talking about their goals and what they really want to accomplish. And usually there are a couple of bigger items that are on the bucket list, if you want to call it, or even the wish list. And that might be a bigger trip. Maybe it’s a big European trip or it’s a big cruise.
We had a family that came to us and said, “We’ve got this goal that we want to take our entire family on a cruise.” And that was a pretty big bill because they wanted to pay for it all. So they were taking the kids and the grandkids and everybody was going to go on this cruise together, but they wanted to do this as grandparents. We’ve had folks come to us and say, “Hey, I need to upgrade the kitchen.” And if you’ve ever looked at upgrading a kitchen or a bathroom, that’s no small thing. That’s usually a big budget item.
And so Murs and I, in just doing this for many years, we came up with this next column called the fun fund. Fun just means it’s extra. I don’t have to have it to survive. I’ve already got my essentials, I’ve already got my wants. All those things are in place. But what would it look like, and we do a lot of what ifs, what would it look like if we did go on a vacation maybe on average every other year that was a bigger vacation? Maybe it was a $25,000, $30,000 vacation. Or I’ve got a kitchen or a couple of upgrades I want to do in the house. And let’s say the average on that’s going to run for the next 10 years. I’m going to spend maybe five to $10,000 a year doing upgrades on the house.
So what we’ll do on that, many times, is we’ll say, “Let’s just put together a fun fund and we’re going to run it for 10 years.” Now the impact of that is very different than if I say I’m going to spend this much money for the rest of my life. Because if a person’s retiring at 65 and we’re running their retirement to 90, 95, that’s a 25, 30-year plan. And if I say I’m going to inflate and build an income plan and it has that extra layer in, that’s going to be huge on the plan.
But the second part of that is we’ve done this for a long time and what we’ve found is, is that most people who retire, first five to 10 years, they do a lot more, they kind of want to accomplish those things that they’ve been too busy working to do and they just want to knock them out. And it’s just exciting. They’ve got all this extra time that they fill up, by the way, because everybody tells us, “And by the way, I’m very busy. I don’t know how I ever could work in working because I’m so busy.” But we’ll build this income fun fund.
Now Murs, just real quick, could you just give us, and I’m going to ask you for a high level because I know that you can think this through here. High level, the difference between running a fun fund for 10 years and what it looks like at age 90 for a base lift or something. I want to paint a quick picture. Person has a million dollars, they’ve got a normal spending plan, but they’re going to spend an extra thousand dollars a month for the first 10 years of their retirement. Kind of scenario A, the fun fund, or that extra income there for their whole 30 years, or it’s just there for 10, just so people can visualize the difference.
Murs Tariq:Yeah, it’s a big difference. And the big part about it is spending 30 years can have a huge impact on a retirement plan. And so the family’s got a million dollars and we have just kind of a fun fund that is built in for 10 years. That’s going to have a significant impact versus if we were taking it and running it out for the entire time. And I’m talking about a couple hundred thousand dollars of impact. And so it could be that they start off with a million dollars and they say, “We just want to spend our fun fund, we want to run it out as long as life will allow us to run it out.” It could be that they end up with three, $400,000 left by the time that they reach age 90 or less.
And so we would talk to them and say, “What is in this fun fund? What are we actually trying to achieve here? And is it realistic?” And we always go back to the clients that we work with, the averages, the normal things that we see to ask, is it realistic that you see yourself traveling at this rate? We’re not saying stop traveling, but we’re saying at this rate into your early eighties, mid-eighties, early nineties even. And the common answer is, “No. You know what? You’re right. This is not going to be the case. So let me do it for the first 10 years and let’s see how things go.” And it’s going to be a couple hundred thousand dollars of a difference when we’re projecting out for so long.
The thing about retirement planning is when we’re looking out, someone retires at 60 or 65 with life expectancy growing into the nineties, that’s a long time to plan for. So we don’t want to be overstating certain things because that has a very big snowball effect when we’re planning for 30-some odd years cumulatively. So it’s a massive couple hundred thousand dollar difference when we’re looking at something running for just 10 years versus running for the end of life.
Radon Stancil:So we hope we got you just thinking about this idea. Because if you’re getting ready for, or you’re right there at retirement, maybe you just retired and you haven’t had this run for you, realize that running this fun fund really does not tax the overall plan that much. Typically, it lets people go, “Wow, that’s amazing. That’s exactly what I wanted.” Exactly what Murs just said. So if you’re listening to this and you think, “I would like to see my fun fund,” we’re glad to be able to help you think that through. If you go to our website, pomwealth.net, go to the top right-hand corner and click on schedule call, we are glad to hop on a phone call with you. We’ll talk to you about what that can look like. We’ll talk to you about how we could build it out so you could see it.
We build these plans out so we could just email it to you if that’s the way you would like to have it. And we can make little tweaks here or there. So if you would like to do that, take advantage of it, if you’ve somebody who’s already got one of those plans with us and you’d just like to see it tweaked now, feel free to let us know and we’d be glad to tweak it for you as well. We hope you have a great week. We’ll talk to you again next Monday.