It's always fun to daydream about what we might do when … we no longer work.
If you had to choose your own adventure, what would it be? Taking a foodie tour through Europe, retiring on a beach, and becoming a late-in-life surfer? It's sure fun to think about, but then there's the reality of sketching out a financial vision for your real-life retirement now.
We asked two couples, and a still-single guy, where they stand today — and what their ideal future might look like. Then we consulted with David Blaylock, a CFP® with LearnVest Planning Services, for his feedback on how they can keep making progress toward their dream retirements.
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The key for each, he says, is flexibility: "I think they will all be O.K. because they're willing to adjust their expectations, like being honest about the possibility of working part time while retired, or being realistic about their standard of living. I'm confident that all three of these households will be able to accomplish their retirement goals — they just have to focus on the right priorities."
Read on to hear exactly where he suggested they focus.
The globetrotting bachelor (for now, at least)
Who: Dave Puketza, 45, a web designer and art director who most recently lived in Brooklyn, N.Y. He recently left a long-term job and is traveling in the Philippines before returning to the States to figure out what's next.
His dream retirement: I'd like to retire between 65 and 70. My ideal retirement involves having enough so that I don't have to worry about covering the basic necessities — to that end, I'm not opposed to leaving the U.S. to go where my standard of living could be elevated without the extra expense. If I have kids, I would like to be able to contribute to their education, and I would like the ability to travel modestly. I have some basic construction skills, so I'd also consider owning an income property where I could serve as landlord. I'd enjoy having a little extra income, as well as the tax benefits that come with owning a rental property.
His progress so far: I made $90,000 at my most recent job, and my income at my next job remains to be seen. I currently have $40,000 in regular savings and $60,000 in retirement savings divided over three 401(k)s.
I don't have any debt or other financial obligations, but I do have a few pending choices to make that will require funds. One is moving back to California. It'll require thousands of dollars, and finding new work will be my most immediate concern. Add to that the move-in costs for a new place and possibly purchasing a car; I'd likely buy a used one, for which I'd be willing to spend between $5,000 to $6,000.
I'd also like to explore the possibility of purchasing a home in California in the next five years. Meanwhile, my significant other lives overseas, so maintaining the relationship would involve costly airfare and, potentially, visa fees for her. Should we marry and she relocates to the U.S., she also wouldn't be able to work right away, so I'd have to support us alone for a while.
I don't feel like I've made good progress on my retirement goals so far. From web research, it seems as though I'm about average for my age in terms of stowing away for retirement, but I don't really gain comfort from this. I've struggled through a few recessions and recognize the volatility of the economy.
The CFP® says: It's good that Dave appears to have sufficient emergency savings and has started saving in his retirement plan. In order for him to pursue his retirement goals, the most important thing for him right now is to do everything he can to maximize his retirement savings.
A move to California could be an opportunity because he could look for an affordable place to live and use what he may save on housing to maximize his retirement contributions. Dave doesn't have quite enough saved for retirement based on his age, so when he chooses a new company, he should also consider the value of its 401(k) match and try to save a larger percentage of his salary toward retirement than he has been. He should assume he'll need about $75,000 a year to live on in retirement, so ideally I would like to see him have somewhere north of $200,000 saved up at this stage.
All the same, I think his target date for retirement is probably doable. The main thing he's got to do now is focus on saving. At age 45, he's starting to lose the benefit of time, which is the most important factor. This is a very critical time for him.
If buying property is something Dave's intent on, he might want to look at a multifamily property where he can live on one side and rent the other side, like a duplex. That could help maximize his return, versus buying a single-family home, and rental real estate could eventually contribute to his retirement portfolio.
I also like the idea of his potentially living abroad in retirement, especially if he likes to travel a lot internationally anyway. Personally, I wouldn't buy property in the U.S. until I was absolutely sure I was staying, or at least staying for the next 10 to 15 years, because real estate doesn't appreciate that fast. Buying a home is a big capital outlay and there's no need to if you might not stay in your home for the long run. That money is too valuable and potentially needs to be in a retirement account instead of tied up in real estate.
I would recommend Dave figure out the cost of living in the country where he'd consider retiring, and then inflate that at 3 percent to take into account that costs will be higher by the time he retires. He would need to have at least that much saved up. From there, he can compare the price tags of retiring here or abroad. He's going to need to save more no matter what he chooses, but if he refocuses on this goal starting now, I think he'll give himself a chance to achieve a realistic retirement.
The future doctors
Who: Ellen Fraint, a first-year medical resident, 28, and Katie O'Neill, 27, a fourth-year medical student. They live in Philadelphia.
Their dream retirement: We'd like to retire between 65 and 70. Ideally we would continue to work part time, at least for a little while. We might do some teaching, or maybe some research, or even work abroad for a little. We'd like to be financially independent enough, though, to not have to rely on whatever income that would bring us. We'd like to own our house by that point, be finished paying for our kids' colleges, and be able to travel. We don't want to depend on our children when we get old or sick.
Their progress so far: This year I'll make $50,000, and that will increase only slightly over the next six years because I'll be a resident for three years, then a fellow for another three. Katie, who would like to pursue trauma surgery, will be making approximately the same amount starting next year and for the nine years of her residency and fellowship. By the end of those seven and nine years, respectively, we plan to stay in academia rather than private practice.
We estimate that after residency, I'll make approximately $200,000 and Katie will make approximately $280,000. I haven't started saving anything for retirement yet; Katie has some in an IRA, but not much, maybe $2,000. Even though I haven't saved any money up to this point, I've been investing in my education for job security — my profession should provide me a reasonable income and the ability to save for retirement down the line.
I am a little bit alarmed, though, at the size of my debt and the "late" age at which I'm getting started in the real world. Katie is nervous about reaching our retirement goals given the amount of training she still has left, although she's confident that her education will provide her with a long and fulfilling career.
I have $255,000 in educational loans from medical school, a mix of subsidized and unsubsidized loans, but mostly unsubsidized. Katie has $23,500 in debt from medical school; $8,500 is subsidized loans and everything else is unsubsidized. We want to be able to buy a house within the next three or four years, and we also plan to start having kids in about three to four years — and for us, having kids will probably come with additional expenses, such as adoption fees. We'd like to have three kids.
I'm glad our tax-paying situation will be a little more flexible [after we get married], because we'll have the option of filing together or separately now that the federal government will recognize our future marriage. For state taxes, though, we will still have to file separately.
The CFP® says: It'll be a while before Ellen and Katie start making a sizable income. When you have educational debt like that and go to pick a job, make sure it can qualify for loan forgiveness, otherwise you're dealing with pretty hefty payments for a long time. That said, they can't wait until they start making big incomes to save, because by the time they're done with residency and fellowship, they'll be in their mid- to late thirties. If they're each bringing in $50,000 as residents, they should try to save at least 10 percent of that income, or around $10,000 a year.
Typically, we suggest that people should expect to spend 85 percent of their pre-retirement income each year during retirement. Since Ellen and Katie will be ultimately making so much, they'll need to save a particularly large nest egg. It's kind of false to think, "When I get to retirement, I'll live on less." 85 percent of pre-retirement income is a good number to consider shooting for.
I'd recommend against buying a home during residency, because who knows where they'll end up, especially if they're working in academia. I don't know that saving for a down payment at this point makes a lot of sense when they have competing goals like emergency savings and retirement.
They would both like to have careers and a family. While they're still residents, they probably won't have the budget for child care, so their timetable for having kids may need to be pushed out, unless they can come up with an alternate solution, like family living nearby.
That said, sometimes the financial answer and the emotional answer don't match up. Maybe they won't want to be first-time moms at age 35, and will decide to have or adopt kids at 32 instead. Then there may be a series of trade-offs: Are they willing to work longer? Willing to work part time during retirement? Willing to take on a lower standard of living even when they start to make more money? Retire a little later? Maybe it's not ideal, but at the same time, what is ideal anyway? For everybody, it's going to be different.
The biggest takeaway is that Ellen and Katie can't wait until they get out of residency to start saving for retirement. It's never too early to create savings habits. This happens to a lot of physicians: They live so cheaply for so long, and then when they finally make money they don't know what to do with it. It's like they hit the lottery. It can be a big challenge.
The new parents
Who: Sue Caufield,* 38, an architect, and her husband Derek,* 36, a marketing director. They're the parents of twin boys who are seven and a half months old. They recently moved to Tokyo from New York City.
Their dream retirement: We'd like to retire by 65, but hopefully by 60 — although I wouldn't be surprised if we consulted or taught in our respective fields on a part-time basis in our old age. The first thing that's important to us is location freedom. We have family based in New York, Los Angeles, and London, and want the freedom to visit them whenever. Right now, our budget does not allow for that.
Ideally, we would also like a small apartment or house in the south of France, as well as in any urban area wherever our sons (or other possible future children) end up settling. We wouldn't mind flipping homes or renting out property as another revenue stream during retirement.
Their progress so far: Prior to having twins, I worked full time and earned $72,000 per year, in addition to starting a side architecture business that brought in $150 an hour at its height. Derek earned $114,000 per year. Not long after starting the side business, I had to slow down due to required bed rest as a result of the pregnancy. I resumed my side projects after giving birth, and was still deciding whether to go back to my full-time job. Derek and I had calculated that most of my paycheck would go toward a nanny.
Two months later, however, Derek received a job offer in Tokyo, which included an expat premium and housing. Derek is getting a salary bump to $132,500 and will be the sole income-earner for the time being, as I'm not allowed to work unless I can find a company that will sponsor my visa.
Having kids was always in our plan, but we were surprised to be expecting twins. We were thrown an additional curveball when I ended up going on bed rest four months before our due date with preterm labor complications. That brought a lot more financial strain than we imagined this year. Thank goodness we had started a baby emergency fund a year before. Everything turned out fine despite our boys arriving six weeks early, but now our baby emergency fund is nearly dried out.
Derek has $80,000 in U.S. retirement accounts and 20,000 GBP in a U.K. pension. I have a total of $96,000 in two rollover IRAs. I rolled over the 401(k) I had with my full-time firm to an IRA, and I have an old rollover IRA from 12 years ago that has about $6,000 in it.
I have $110,000 in student loans for graduate school left to pay off at an interest rate of 2 percent. I've already paid off $60,000 in private loans. For all of 2012, I was paying about $1,000 to $1,500 per month, which was more than the minimum, to prepay the current loans, knowing that I might not be able to pay the minimum monthly amount due [if we had kids]. This worked out in our favor as I haven't been working since July 2013, much sooner than planned. We plan to continue my debt repayment within a few months after we settle in our new city.
Competing for our attention are our kids and all their related expenses, especially twin college funds. We also want to focus on savings for property investments and future homes. My student loan debt makes me feel like all this is going to be impossible.
I am a U.S. citizen and Derek is British (he is giving up his green card now that we are moving abroad), and we probably won't return to the States for the next 10 or more years because of work. I will probably not be earning any income while we are in Tokyo, and am uncertain what my work situation will be once we move on to another city or country.
I feel uncertain about how I can continue to save for retirement as a stay-at-home mom in my expat situation. And I'm not sure how easy it will be for me to go back to work — especially in a country where I don't speak the language and where there are different rules and regulations for architecture. It was also easier to max-out retirement contributions when it was just me and my husband. Now that our kids are in the picture, I'm certain additional expenses will mean we may end up putting less and less toward retirement and savings.
The CFP® says: Sue made a pretty good salary and contributed quite a bit to her 401(k), so she really helped their retirement accounts grow. I understand it's difficult for her to work overseas, but I think that if their plan is to be overseas for 10 years or more, she's probably going to have to find work.
They have two big things to fund: She has $110,000 in student loan debt — although it's good she has a low interest rate — and they're under-saved for retirement. Even if she were making, say, $40,000 to $45,000 a year working part time when the twins are a little older and don't need as much child care, that would help quite a bit. Could they save enough for retirement based just on his salary? Probably. Could they do that and pay all those student loans? It's tricky, because they don't really have catching up to do, but they do need to keep doing what they've been doing, even without her income.
They've eaten through their emergency savings, so priority number one should be to build that back up. Whether or not Sue eventually ends up working, the order of priorities stays the same: emergency fund, retirement, debt repayment, and then college savings. Often parents want to save for college above everything else, but typically it shouldn't go in that order. I'm worried that with the move, paying for twins and Sue not working, she and Derek could lose momentum.
It's a huge deal that his new job covers housing costs. Instead of a monthly house payment, maybe they can continue to set aside the amount they'd otherwise pay for housing and put it toward replenishing their emergency savings and a retirement plan instead. Sue can contribute to a spousal IRA as a non-working spouse. That allows her to put in up to $5,500. They should also consider checking whether the U.K. has provisions for retirement contributions for non-working spouses as well.
Because Sue and Derek will be living outside the U.S. for the near future, they should also consider seeking out a financial professional in the country where they live, to help them understand that country's retirement saving rules, tax laws and other financial considerations that they'll face abroad.
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