It’s a popular vision for retirement—all the time in the world, and the freedom to travel everywhere you’ve ever dreamed of. But don’t skip the reality check.
Retirement is the time to travel, when you aren’t restricted by a one or two-week vacation limit. Instead, the limits are financial. Whether your retirement dream is a trip around the world or seeing the nation’s great national parks in an RV, you’ll need to consider how you are going to pay for your travels. Most retirees don’t do a good job of budgeting for travel, and a few years later, face the strain of reduced funds.
CNN Money recently published an article, “How to budget for travel in retirement” in which it notes that some retirees realize that travel expenses are 40% higher than expected, but 58% of seniors don't budget for travel in retirement at all. Here are some tips on budgeting for travel ahead of time.
- Calculate what you can spend on travel annually. You need to plan your trips with a strong sense of how much money you have available to spend. As a general rule, you can withdraw about 4% of your nest egg's value each year without having to worry about running out of money in retirement. However, you'll need to deduct for taxes (unless your savings are in a Roth account) before you do anything else. Remember that 401(k) and IRA withdrawals are considered income, so the IRS will tax that cash. You also must estimate your basic living expenses, like housing, food, clothing and healthcare. Once you've accounted for these essential costs, you can then see what you can spend each year for travel.
- Prioritize your trips and appreciate their costs. Once you get a feel for how much you can afford to spend on travel, you next need to maximize that money. Identify the trips most important to you and get a good sense of how much they'll cost. Don’t just guess!
- Add a cushion. Once you see how much your dream trips will cost, you’d be smart to look for any senior discounts. That may be savings on car rentals, meals or even hotels. It's also important to build a buffer into each trip's budget to account for the unknown.
Remember that things like tips, taxis and souvenirs always cost more than you think.
Don’t miss this part: make sure to buy good travel insurance from a reputable broker to protect your investment, if a health issue crops up or plans are disrupted. You would never buy a house or car without insurance. This kind of spending requires the same level of protection.
Reference: CNN Money (February 5, 2018) “How to budget for travel in retirement”