When we think of life's events, weddings, anniversaries, and major parties might come to mind. But in the context of retirement planning, events are defined much broader. An event can be any expense or temporary source of income that will draw from or add to your savings.
Even the most detailed retirement calculator cannot capture all of our unique, individual circumstances. Some one-off expenses, like college expenses for a child, can be anticipated and planned for far in advance. Others, like a surgery not covered by health insurance, normally have to be added to our retirement plan only when they show up unannounced.
Temporary expenses are usually included in retirement calculators through a feature called “events”. It is a commonly overlooked feature until we realize how valuable it can be. Once we get a handle on it, we can't imagine retirement planning without it!
The only events before retirement that matter for retirement planning purposes are the ones too large to cover from your disposable income. These are things like kids' college, a major surgery not covered by insurance, a few years of extensive traveling, and similar substantial expenses. There's nothing wrong in letting these events come out of your savings, as long as they are reflected in your retirement calculations.
Such larger items often require that you save up for them in advance (separately from your retirement savings). To get the complete picture of your financial reality, you may prefer to model these savings all in one place. You can then see how everything works together and how your major one-off expenses will affect your finances before and after retirement.
Here are a few examples of how to use the events feature in your retirement calculator.
Example: Savings towards first home
Jim, who is in his mid-20s, has set a goal to buy his first home twelve years from now. His retirement calculator can model home purchases and sales, so he set up his future home purchase in the calculator's real estate section. However, he wants to model saving for the down payment as well. He can model this with a monthly event where he adds a constant $1,500 a month to his after-tax savings, from next month until the month of his desired home purchase date. This is on top of his retirement savings.
Example: Saving towards kids' college
Robert and Jill want to save a constant $1,000 per month towards the college costs of their two kids. They want to start in January of next year and continue until the month they expect to pay their last college bill. In their retirement calculator, they set up a monthly event where they add $1,000 a month to their after-tax savings over the above time span.
Example: Paying for kids' college
Art and Julie want to pay $15,000 per year towards the college expenses of each of their two kids ($60,000 total per kid). They want this amount to be increased with 2% inflation. They also plan to pay the entire $15,000 (increased with inflation) at the beginning of each school year. They can model this in their retirement calculator with two “events,” one per child. The first event will cost $15,000 per year (increased with 2% inflation) from the year their first child turns 18 (and they have to pay for his freshman year) to the year he turns 21 (and they have to pay for his senior year). They set up the second event in the same way, but with respect to their second child.
Example: Upgrade car every few years
Mark wants to sell his car and buy a new one every six years. He expects his net cost from the trade to be $20,000 each time, in current prices, increased with 2% inflation per year. He wants the first upgrade to happen next year and he wants to stop upgrading when he turns 85. With the first upgrade coming up next year, he already has some after-tax savings, which he added to his retirement calculator. Then he set up an event where $20,000 (increased with 2% inflation) is subtracted from his after-tax savings every six years, over his desired timespan. Note that this event will span over both his pre- and post-retirement years.
Example: Wedding of a child
Bill and Wendy want to contribute $15,000, in current prices, towards their daughter's wedding next year. They can model this expense in their retirement calculator with a one-time event where $15,000 is subtracted from their after-tax savings next year. The money will be coming from their brokerage account where they have saved up $100,000. Importantly, they added that money to their retirement calculator, too.
Example: Buying a boat
Jack wants to buy a sailboat worth $17,000 paid in monthly installments of $1,000 from April of next year to August of the following year. He is not retired and buying a boat before retirement doesn't really have much to do with retirement planning. However, Jack has $300,000 in a non-retirement account, which he wants to use for his expensive hobbies and treat whatever is left as retirement money. He added that account in his retirement calculator. Now he needs to add any withdrawals he plans to make from this account so that his calculator can figure out how much will be left for retirement. He added a monthly event where $1,000 per month is subtracted from his after-tax savings during the above payoff period.
Hopefully, your retirement calculator automatically projects and applies all your taxes and required expenses after retirement — those related to your home, health care, and any children you may still be supporting. After subtracting all that, it probably tells what your monthly disposable cash will be in retirement — your personal money for everything else. However, large one-off expenses do come up — both emergencies and splurges. It may be awkward or impractical to save for them from your monthly personal budget. This is where events come in. They allow you to see the impact of these one-off expenses on your retirement plan.
Example: Six months in Mexico
A retired couple plans to spend six months in Puerto Vallarta from November of next year through April of the following year. They expect to spend about $2,000 per month while there. This is on top of their personal monthly budget and on top of their housing expense back home (which they still have to pay while abroad). In their retirement calculator, they set up a monthly event for $2,000 over their six months in Mexico. After adding this event and re-running their retirement calculator, their personal budget over the remainder of their lives decreased by $200 per month. They were okay with it and went ahead with this exciting adventure.
Example: Major surgery
Carol is planning to get a major surgery next year, which is estimated to cost $15,000 out of pocket. She is currently retired, and her retirement calculator makes an allowance for her health care costs. However, she budgeted only $2,000 per year for out-of-pocket expenses and she wants to see how her $15,000 bill will affect her long-term plan. She set up a one-time event for $15,000 that occurs next year.
Sophia is the only child of her parents. Her dad already passed away, and her mom, who is 80, is not in great health. Her mom told her that she is okay with selling their property when the time comes. Sophia felt uncomfortable at first including future inheritance into her retirement plan, but then felt that some prudent advance planning is probably okay. She set the timing of the inheritance to when her mom is 100 years old. She figured that if the property were to be sold today, they will probably net around $400,000, after fixing it up, commissions, and taxes. She expects this amount to increase with 2% inflation per year. She modeled this in her retirement calculator with a one-time event where $400,000, increased with 2% inflation, is added to her after-tax savings twenty years from now.
Example: Travel the world while you can
A retired couple wants to travel extensively over the next 10 years, starting from next year. They expect this to cost them $10,000 per year, in current prices, increased with 4% inflation per year (they assume they'll need more and more comforts each year). They modeled this in their retirement calculator with an annual event that costs $10,000 per year, increased with 2% inflation, over the next ten years.
None of us would ever consider simplifying our lives to match the simplicity of our retirement calculator. Our retirement calculator needs to be sophisticated enough to handle the fullness and complexity of our lives.
There are many aspects of life that have nothing to do with numbers. But for those aspects that have everything to do with them, why not have the peace of mind knowing that the numbers are as accurate as possible? By having the ability to set up events, both before and after retirement, a retirement calculator can help you do exactly that.
Unplanned one-off expenses can have a substantial impact on your standard of living in retirement. But with diligent planning, you can reasonably expect to afford both – accomplish your major shorter-term goals and enjoy your desired lifestyle in retirement.