With my twin boys set to turn 2 here in a few weeks, my wife and I were just discussing how quickly the years go by and not wanting to miss the opportunity to take vacations together as a family while they are still young.
Some purposeful conversations ensued and specifically we discussed experiences we would like to have together, which for the moment mostly resulted around vacations and trips we could do in the coming years. How though, should we plan financially for this?
While I’ve used Disney World in the title, this could apply to any vacation. Given the popularity of Disney as a theme park as shown below, the shear cost of Disney, and of course the recent release of Disney Plus, I concluded it would be the most relatable destination.
How do we pay for this?
Being a financial planner, one of my first thoughts is always, how do we pay for this? Given Disney World can cost between $3,000-$10,000 for a family of four, this likely would not be an easy answer!
Particularly, when I look at my financial portfolio comprised of 401(k)s, Roth IRAs, HSAs, and IRAs. All retirement or other long-term focused account, and none of which intended or helpful for me in my desire to take my family to see Mickey Mouse.
Of course all necessary accounts are prudent for a financial portfolio given the numerous tax benefits and tax favorable investment growth among other benefits. The ease of use of employer sponsored plans (401k, HSA) is particularly nice as I can set my contributions up to automatically happen each pay period.
When making financial decisions, I always revert to my documented financial plan for guidance and reassurance of the various outcomes of my decisions. What I wanted to see was, how much do I really need in those long-term retirement focused accounts? Or asked another way, based on my current level of lifestyle, how much do I need saved to cover my lifestyle in my non-working retirement years?
After running a few scenarios to get a feel for what it took, I was comforted in knowing I was on pace to have a successful plan. As financial planners our default recommendation can often be to maximize your employer 401k, Roth IRA etc. using the max contribution amount set by the IRS. However, what I found was I don’t need to max my retirement accounts in order to have enough to cover my needs in retirement and can therefore direct these funds to other more accessible and flexible accounts. This of course can vary greatly for everyone’s situation and can be most influenced by the level of lifestyle you desire to live (the higher the lifestyle the higher financial resources you’ll need in retirement).
What type of non-retirement accounts can we use to financially position ourselves to take our family on vacations or other shorter-term related items?
1. General Taxable
Have a general taxable account where you deposit savings into each month, annually etc. This account can be invested in the market and is accessible if funds are needed.
2. Bank account
Probably the easiest solution is just to stash extra savings at the bank. However the rate of return is often minimal outside of some online savings accounts. Also, you must consider potential security issues with the bank account.
3. ESPP
Offered by your employer and gives you the ability to purchase your company stock at a discounted rate (typically 15%). After a holding period you’ll have the ability to sell those shares and could then have a sum of cash to use.
4. Income
Consider your one-time or periodic income items such as annual/quarterly bonuses or if you have RSUs when they vest. If you don’t count on these periodic income events as part of your “normal lifestyle,” then you could allocate the proceeds of these events to a family vacation.
How should you invest money that you’re planning on using in the coming years for vacations etc.?
You’ll want to determine the time horizon for upcoming cash needs:
| Account Balance | Vacation Spend | Annual Contribution | Net Cash Flow | |
|---|---|---|---|---|
| 2020 | $20,000 | $5,000 | $3,500 | -$1,500 |
| 2021 | $19,100 | $5,000 | $3,500 | -$1,500 |
| 2022 | $18,173 | $5,000 | $3,500 | -$1,500 |
| 2023 | $17,218 | $5,000 | $3,500 | -$1,500 |
| 2024 | $16,235 | $5,000 | $3,500 | -$1,500 |
| 2025 | $15,222 | $5,000 | $3,500 | -$1,500 |
| 2026 | $14,178 | $5,000 | $3,500 | -$1,500 |
| 2027 | $13,104 | $5,000 | $3,500 | -$1,500 |
| 2028 | $11,997 | $5,000 | $3,500 | -$1,500 |
| 2029 | $10,857 | $5,000 | $3,500 | -$1,500 |
The table above is just an example of how a General Taxable account have where your withdrawal from each year for your vacation budget, but also contribute to each year to replenish. Starting with a $20,000 account balance and assuming annual return of 5%. In the above example, when investing that account balance you would want ~$1,500/yr. for 5-7 years in very conservative positions so you could still withdrawal the money if the market dropped. The rest could be in stock funds which would anticipate higher return. Potentially you’d be looking at about 50% stock and 50% cash for this account. All rough numbers in this example but wanted to help you visualize this potential setup.
Financial planning should provide confidence knowing that you’re positioning your money in such a way to accomplish current priorities as well as your future lifestyle, not just accumulating a big pot of money in your 401k.
