At an age when many other couples still don’t have their day-to-day finances in shape, Sarah Britton and Will Gonzalez were already planning for their retirement. He was 36, she was 30. They had no children, and they were already in such good financial shape that they folded up their lives for a year of travel around the world: South America, Eastern Europe, Africa and Southeast Asia, plus bicycling across the southern United States.

“We had a lot of time together to talk about life planning,” says Britton.

They had started good careers. She was an attorney; he had his own lobbying firm. They figured that each would retire at 55. They wanted their kids to be out of college by then, so they didn’t want to wait much longer to start a family. They didn’t want to be saddled with a mortgage payment in retirement either, so they would have the house paid off.

Six years later, they have two children, now ages 4 and 2. They refinanced their mortgage to make sure it’s paid off in time and scaled back their wanderlust to keep their finances on track. Britton hasn’t used her passport since the big trip, though the couple bought a small, used RV to help introduce the kids to the world.

Not every couple plans that far ahead with such discipline, many hitting retirement age unsure how they will stretch their savings — if they have any.

Even if couples don’t have the income of an attorney or lobbyist, it’s still smart to start young, say financial planners. The more time a couple has to build assets, the easier it is. The specific investment strategy matters less than making the commitment.

“I think it’s about new habits and finding what works,” says certified financial planner Cynthia Meyers, who runs her own firm in Sacramento. “It’s like a good exercise program. Yoga might work for one person, Pilates for another, weights for another. The important thing is to find a system that is going to work for you.”

Setting just one modest financial goal, whatever it is, can initiate good habits that will make retirement more comfortable, she says.

“Unfortunately, most people are procrastinators,” says Jonathan Froude, a retirement income planner at Lifetime Financial Solutions in Sacramento. “It doesn’t really hit them until they are within five years of retirement. I meet more people in their late 50s that really haven’t prepared and haven’t saved much.”

For some couples, it’s even worse.

“Some are already retired and didn’t really make a plan and are backtracking to see what they can do,” Froude says.

Only about half Froude’s clients know what they want out of retirement, and even fewer have an idea of how to get there. In some ways, lack of vision is not surprising. Only a few generations ago, many people simply worked until they died. Then came the post-war corporate world where the husband’s pension and social security had most of retirement covered. It hasn’t been so long that the majority of couples have had to figure out retirement on their own.

“Unfortunately for the baby boomers and those after us, there hasn’t been a road map for us. We’ve had to invent as we go,” Meyers says.

While the retirement landscape has changed, people’s saving habits haven’t. A key measurement is the ratio of wealth to income, which indicates how easily people can replace their pre-retirement income. For the past three decades, the Center for Retirement Research at Boston College has been tracking the ratio across different age groups.

Regardless of the generation, wealth starts out as a small fraction of income when people are young, and rises to about four times annual income by age 59 to 61. That steady pattern since the 1980s is bad news, the researchers say.

In those same decades, life expectancy rose by 3.5 years for men and 1.8 years for women, so retirement money will have to last longer. Health care costs for patients over 65 are three to five times higher than costs for patients under 65, according to the U.S. Department of Health and Human Services. Health care costs have risen faster than Social Security benefits. Today’s low interest rates mean retirement savings won’t generate as much income as in years past.

Then there’s the change in the way retirements are funded. Pensions used to be the norm. The survey doesn’t count those among a person’s assets because those are future benefits. But the survey does count assets in a 401(k) plan because those are hard dollars under an individual’s control. As 401(k) plans became the norm, the wealth-to-income ratio should have climbed, but it didn’t.

“I’ll have a husband and wife sitting in my office, they have a great relationship, but by the end of the session one is looking at the other with a tilted head and says, ‘I didn’t know you wanted to start a foundation.’”

Matt Page, financial planner, Capital Planning Advisors Inc.

 Early retirement offers additional challenges. A person must be 65 to get Medicare benefits, for example. Anyone retiring earlier has to cover his or her own health insurance costs, which tend to rise with age. Social Security benefits can start at age 62, but the checks will be a lot smaller than they would be at age 70 (see the difference yourself at www.ssa.gov/estimator). Couples may have to adjust their expectations downward.

Technically, there’s always time for some damage control right up until the day of retirement. Even that date can be pushed back to allow more time to max out the 401(k) contributions and postpone the need to draw down savings.

A vision of retirement is a good starting point, no matter how it may have to bend to a changing reality as the years go by. Matt Page, a certified financial planner with Capital Planning Advisors Inc. in Sacramento, always starts out with new clients by asking them to paint a picture of retirement.

“If their idea of retirement is sitting on the porch reading the newspaper for a couple of hours a day, that’s one direction,” he says. “Do they think they want the Norman Rockwell retirement with the kids around the turkey dinner at Christmas, or do they see themselves traveling?”

The vision gives a sense of what the couple will be spending, and thus what they should be saving. It’s rare that a husband and wife have exactly the same vision of retirement, but often it’s more a matter of details, Page says, such as whether they’ll travel two weeks out of the year or eight weeks.

“It’s like any kind of conversation you have with a spouse, it’s a compromise,” he says. “There’s a lot of psychology that goes on in my office. More often than not, I’ll have a husband and wife sitting in my office, they have a great relationship, but by the end of the session one is looking at the other with a tilted head and says, ‘I didn’t know you wanted to start a foundation.’”

The earlier the discussion starts, the better, financial planners say. Not surprisingly, they want to be in on the discussion.

“I think a good financial planner is going to make the whole process easier for you, and that frees you up to do what you do best: Make that money and let the financial planner design ways to keep and save it,” Meyers says.

When Page is part of the discussion, he likes to work out the numbers for specifics, such as spending six months each year abroad. That includes not only the travel, but the cost of maintaining two households.

Couples also need to think about how they behave socially, with one another and with the outside world.

“Do you need a lot of social contacts or just a few? How are you going to do that?” Meyers asks her clients. “Are you part of communities that will continue, perhaps a church or a reading group? Are you someone who can set your own structure? Are you a self-contained person?”

Financial planners say most of the couples they talk to have some sense of what they can and can’t afford in retirement. But some are less realistic.

“People who do that are usually younger in age and want to retire younger. I run the numbers for them and show them that it is not realistic,” Froude says. Like the folks who think a $100,000 retirement account will carry them. In fact, even with 5 percent return — which is tough to get these days — the income would be only about $400 a month without touching the principal.

“Those are the ones I say, unfortunately, you can’t afford to retire right now,” Froude says.

The old rule of thumb held that retirement income should be about 80 percent of pre-retirement income. But in reality, Meyers says, most people expect to keep living the same way they did before retirement, especially if they retire young. So if you make $60,000 a year and want to fund 30 years of retirement, you’ll need $1.8 million. That doesn’t necessarily mean it all has to be in the bank. A “mere” $1.5 million will generate $60,000 a year at 4 percent interest without even touching the principal.

At Zeller Kern Wealth Management in Gold River, CEO Steven Zeller tells his clients to think of their money going into five buckets. The first is for retirement assets. The second is an income reserve bucket, something they can live on for a couple of years in case something drastic happens to their investment assets. The third bucket covers major expenditures such as a new car five years into retirement, or a new roof on the house in the next decade. 

Bucket four is the lifestyle bucket, covering travel and other niceties. Fifth is the rainy-day bucket, in whatever amount feels comfortable.

“I know it’s kind of a dream list for marginally higher-net-worth individuals nearing retirement, but that’s how I would prepare for major disruption,” Zeller says.

Still, people adjust to circumstances.

“If you go through another 2008, you take a trip to Florida that year instead of South America,” Page says. The retirement picture is never static, even after the start of retirement.

“When we help people make that transition to retirement, if they come up a little short, they tend to make adaptations,” Meyers says. “I think the people we see that are lost or have a little bitterness, it’s because life has thrown them curves they have not been able to adapt to.”

If one spouse has dreamed of a host of retirement projects but instead has to become a caregiver to the other spouse, the unexpected change can rankle.

With the economic turmoil of the past four years, some of the old guidelines are being called into question. For the past century, inflation has averaged about 3.5 percent annually. But health care costs have been rising about 11 percent a year, according to Zeller.

Public pensions used to be considered rock solid, but not in the current era of pension reform.

“I have a client, a retired teacher, and she’s absolutely fine throughout her retirement, unless something happens to the pension. Then she’s not fine anymore,” Zeller says.

His firm likes to run a probability analysis on client retirement plans. That is, what is the probability that they will have X amount of assets at the end of their life expectancy? When the probability falls below 80 percent, it’s time to step back and change the plan.

Will they keep buying a new car every year, or will they buy their last car at retirement and try to make it last? Would it make sense to take a part-time job to bring in a little income and stay active?

A little more exercise may be as important as a little more money. It makes a huge difference in the quality of life, if not the length, Zeller says. Good health also means a person could go back to work if necessary.

The couples most likely to succeed in their retirement planning are those who know what they do well, know where to get help in other areas, and have developed good financial habits, Meyers says.

Whatever their retirement goals are, it’s important to revisit them every few years. Health issues pop up. People divorce or remarry. A 40-year-old’s vision of retirement may not be the same at 50. Some people get to retirement age with the realization that they don’t want to retire at all.

But the key, financial planners say, is to have prolonged work be an option, not a
necessity.

What is $1 million really worth?

If you retire with $1 million in the bank and are able to earn just 3 percent above inflation annually, according to Financial Engines, you could theoretically support yourself with the followig annual expenditures:

$117,231 per year for 10 years
$83,767 per year for 15 years
$67,216 per year for 20 years
$57,428 per year for 25 years
$51,019 per year for 30 years

But that’s just a ballpark in a vacuum. Markets change and inflation is inconsistent, but you can determine whether your nest egg is sufficient by performing a stress test on your portfolio. The editors at marketwatch.com suggest you assume negative returns and high inflation for the first two years. For this test, you will need to know how much money you have saved for retirement and how much money you want to live on for a year. This is your “annual distribution.” Then, you need a list of realistic investment portfolio returns. We suggest asking your financial advisor for his or her annual returns for the past few decades (the longer the time period, the better).

Sara Nunnally, editor of Smart Investing Daily, ran this test using the Fidelity Balanced Fund as an example:

This fund has returned 9.41 percent a year over its lifetime. Not bad. But that return masks the -31.31 percent the fund had in 2008. That’s why it’s important to look at actual returns on a year-by-year basis.

Take a look:
2000       2002        2004         2006         2008
5.32%     -8.49%    10.94%     11.65%     -31.31%

Now, here’s a chart of the Consumer Price Index changes for the same years:
2000     2002     2004     2006     2008
3.4%     2.4%     3.3%    2.5%     -0.1%

Here’s the stress test:
Take your annual payout from your retirement fund, and raise it by the Consumer Price Index figure. So if you’re taking out $50,000 and inflation is 3.4 percent, your following year’s payout will be $51,700. The year after that, your payout is $52,527, using 1.6 percent inflation from the CPI chart to the left.

At the end of 10 years, your payout has increased to $64,218, just to keep up with inflation.

Next, for each year, you’ll need to account for your portfolio gains and losses. Let’s say your portfolio is $1 million strong. At the end of a decade, using these gains and inflation figures, you will have $966,135 left in your account.

At the end of 30 years, your annual payout climbs to $105,994, and your nest egg has only $37,025 left. (To find these numbers, Nunnally repeated the decade of annual fund gains and annual CPI.)

Is 30 years enough for you? Maybe. But Nunnally adds some more assumptions, bumping up inflation and slashing some gains.

Let’s say that for the first two years the Fidelity Balanced Fund didn’t make any gains, and inflation was at 5 percent and 6 percent. With these new rates, $1 million only lasts 22 years.

In fact, if you want your nest egg to last 30 years in this stressful environment, you’ll need to have another $275,000 tucked away.

But now, let’s say the first two years of your retirement, your investment portfolio loses value. A modest 5 percent loss for both years. Your $1 million portfolio lasts only 19 years. You’d need more than $1.5 million in order to make it through 30 years.

Obviously, these are only tests. We can’t say for sure how high inflation will be over the next decade or three. And we don’t know how well portfolios will perform, either. But testing your portfolio can give you a better idea of how ready you might be for retirement.

You may need to adjust your lifestyle now and try and save some more before you retire. You may need to rethink your standard of living for your retirement. In the worst stress-test example, a $40,000 payout at the start of your retirement will make your portfolio last six years longer.

There are lots of unforeseen risks out there, so put your portfolio through a stress test, and see if it can withstand some hard times. You might be surprised at what you find.