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Here is a tough financial
planning challenge:
How do you save to take a year off as a sabbatical, or go a big (expensive) vacation, and
still stay on track with saving for your retirement?
What if you also have student loans you desperately want paid?
Answer: it depends on your situation!
If you get a large capital influx
The easy solutions would be some massive influx of capital, such as stock options in a company that skyrockets in value or a huge inheritance … or winning a major lottery prize. Such an influx of capital would provide funds to pay off the debt, invest for retirement and cover the costs of a sabbatical or round-the-world vacation.
If your spending is meager
At the other end, the problem might be soluble if your needs at retirement are quite modest. Meager needs would require less saving to reach retirement, allowing you to spend more now and even take off from work for a period of time.
Everyone else
If you’re spending is average, and you don’t have the fortune of a major capital influx, then you really need a good plan that plots out how you will pay off the debt, save money for the sabbatical or vacation, and still save and invest enough to meet your retirement needs.
Possible strategies
Obviously, one strategy would be to delay retirement. This way you need to save and invest less now to fund your lifestyle when you do retire.
Another strategy would be to commit to saving a great deal now and after the sabbatical or vacation. This would mean serious cost cutting on expense so you can save more when you are earning.
Using debt more is another strategy. That is, you can’t do it all immediately, so you may have to live with the student loan debt longer than planned. If you can keep saving for retirement, you may want to borrow to fund the sabbatical or vacation, with a plan of
paying it off afterwards.
Cost-out your goals
How do you pick and implement the best strategy? First, quantify your options. You can calculate what you need to save for retirement. This includes what you set aside in your 401(k) or 403(b) plan and any Roth IRA or SEP-IRAs.
When you cost out saving for the sabbatical or vacation, you cannot count on the return you expect from retirement savings. You have short time horizon and cannot take as much risk.
Review your student loan debt to see the interest rate. If it is low, you want to delay paying anyway. See Let’s really talk about risks.
Devising a plan – the goal and resource mash up!
Any planning problem can be solved; it just requires pushing around all the possible resources and variables so that you fit the square peg in around hole.
You sort through the cost of the goals compared with the total you have decided to save for the goals. If what you can save doesn’t allow you to meet your other goals and still take a full year off, then maybe you would have to settle for nine months, or a less expensive vacation.
Okay, now get going and good luck (and send us a postcard when you do go away).