How to Plan for Travel in Retirement

One of the more enjoyable aspects of retirement planning is envisioning the future lifestyle you want to enjoy. For many retirees, travel is a big part of that picture. According to the 19^th Annual Transamerica Retirement Survey, 67% of American workers dream of traveling once they retiree.

One potential obstacle stands in the way of those dreams: the cost. The international travel agency network Virtuoso reports that the average retiree spends $11,077 a year on travel. Yet in 2018, some 26 million senior Americans had less than $25,601 in yearly income from all sources, according to the Pension Rights Center.

That doesn't leave much wiggle room for seeing the world, but 59% of workers remain confident that their financial strategy will allow them to travel in retirement. Making the numbers work to accommodate travel plans involves budgeting and financial goal-setting before and after retirement begins.

Consider Everyday Spending

Before focusing on travel, first consider your preparedness to manage everyday expenses in retirement.

“It all begins with: Do we have the cash flow to cover our normal cost of living and then add to it the cost of traveling?” says Ken Moraif, a certified financial planner and senior advisor at Retirement Planners of America in Plano, Texas. “If the answer is, ‘Yes,' then we’re good to go. If the answer is, ‘No,' then we have work to do.”

The more you save for retirement, the more leeway it gives you in planning travel spending. Moraif says reviewing retirement income and spending can help answer key questions, such as:

• Is the trip too expensive? If so, can it be done at a lower cost?
• Can the retiree afford to travel based on current cash flow?
• Does it make more sense financially to delay travel in order to save for it appropriately?
• How many trips can the retiree afford each year?

Moraif says determining how much one can spend on travel annually helps shape a travel budget. “Based on that budget, we can decide if we want to take one major trip each year, or if we want to take multiple smaller trips each year,” he says. “Since each trip could be different, the most important costs will also be different for each trip.”

The travel budget should include airfare or other long-distance transportation, accommodations, food, shopping, entertainment, and local transportation.

An often-overlooked cost for retirees is medical care. “Most medical plans don’t provide coverage overseas, so it’s prudent to be aware of what is covered in one’s medical plan,” says Simi Dhall, certified financial planner, vice president and wealth strategist in Lenox Wealth Advisors’ San Francisco office. “It’s also important to note that traditional Medicare generally does not provide any coverage when traveling overseas, other than some in-patient services in Canada or Mexico. Dhall says some Medicare Advantage plans may cover expenses incurred outside the U.S.

Travel insurance will likely be a wise purchase, but one that must go into the budget. The plan you choose should cover both medical issues while traveling and trip cancellation due to illness of the traveler or other family members, which can delay or interrupt trips.

Have a Goal and a Timeline

Once a travel budget is fixed, saving for it is the next step—and the sooner, the better. Chris Jackson, CEO and founder of Los Angeles-based Lionshare Partners, says saving early allows “the power of compounding to do the heavy lifting in funding these goals.”

Jackson recommends using a bucket strategy to plan retirement savings goals, including eventual travel spending. “That means having a fixed expense bucket, a variable expense bucket, and a future bucket,” he says. Travel falls into the last category for those who are still just planning retirement.

Earmark travel savings in a liquid savings account, money market account, or certificate of deposit, or allocate a portion of the investment portfolio for those expenses.

Pay attention to the timing. “If you’re using your portfolio to cover your travel expenses, then it’s important to remove that portion from your [higher-risk] assets if you plan on traveling in the next three to five years,” Jackson says. Moving travel savings from stocks into bonds or into another relatively safe investment can help insulate those assets from market downturns.

In addition to market volatility, consider how inflation may impact travel savings goals. Even if inflation moves at a moderate pace of less than 3% each year, travel may be much costlier by the time a current worker retires. To compensate, travel savings need to generate an average return at least equaling inflation each year.

Another factor: Taxes on savings and investments may diminish those returns. If one anticipates landing in a higher tax bracket in retirement, it may be beneficial to save for travel expenses in such tax-advantaged vehicles as a Roth individual retirement account, which allows for tax-free distributions after age 59½.

The Bottom Line

Living the travel lifestyle in retirement is a lofty goal and requires prep work. Comparing the costs of travel to various destinations is another important part of the process, in addition to budgeting and saving. Casting a wider net of cities or countries to visit may allow a retiree to stretch travel savings further.