One of the most exciting aspects of retirement planning is envisioning the lifestyle you’ll enjoy. For many retirees, travel is a big part of the picture. According to the 18th Annual Transamerica Retirement Survey, 70% of American workers dream of traveling once they retiree.
There’s one potential obstacle standing in the way of those dreams: the cost. The average retiree spends $11,077 per year on travel. Meanwhile, the mean after-tax household income for seniors 65 and older was $44,051 as of 2017.
That may not leave much wiggle room for seeing the world but, according to Transamerica 59% of workers are confident that their financial strategy will allow them to travel in retirement. Making the numbers work to accommodate your travel plans involves budgeting and financial goal-setting, both before and after you retire.
Use Everyday Retirement Spending to Plan Your Travel Budget
Before focusing on travel, first consider how financially prepared you are to manage your 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, certified financial planner and senior advisor at Money Matters in Dallas, Texas. “If the answer is ‘yes,' then we’re good to go. If the answer is ‘no,' then we have work to do.”
Analyzing your current cash flow and your projected retirement spending can help you determine how much money you can realistically allocate to travel. The more retirement assets you have, the more leeway you have in planning travel spending.
Moraif says reviewing your retirement income and spending can help you answer key questions, such as:
- Is the travel you want to engage in too expensive? If so, can it be done at a lower cost?
- Can you afford to travel, based on your current cash flow?
- Does it make more sense financially to delay travel plans so you can save for them appropriately?
- How many trips can you can afford to take each year?
Moraif says once you determine how much you can spend on travel annually you can shape your 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.”
Your travel budget should include airfare, hotel accommodations, food, shopping, entertainment and local transportation but 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, 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 you outside the U.S. If you’re concerned about a coverage gap, purchasing travel medical insurance may be a wise choice. But, it's one that you have to budget for.
Set Travel Savings Goals Based on Income, Timeline
Once you have a firm travel budget number in mind, saving for it is the next step. The sooner you’re able to begin setting aside money for travel in retirement, 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 your retirement savings goals, including eventual travel spending. “That means having a fixed expense bucket, a variable expense bucket and a future bucket,” he says, which travel would fall into if you’re still in the planning stages of retirement.
You can earmark travel savings in a liquid savings account, money market account, certificate of deposit or allocate a portion of your investment portfolio for those expenses. Just remember to 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 risk assets if you plan on traveling in the next three to five years,” Jackson says. Moving travel savings from stocks into bonds or another safe investment can insulate those assets from market downturns.
In addition to market volatility, you should also consider how inflation may impact your travel savings goals. Between 2000 and 2018, for example, travel lodging prices rose by 39.99%. Even if inflation moves at a moderate pace of less than 3% each year, you could still pay much more for travel by the time you retire. To compensate for that, your travel savings would need to generate an average return at least equaling inflation each year.
You’d also have to factor in how taxes on your savings and investments may diminish those returns. If you anticipate landing in a higher tax bracket in retirement, it may be to your advantage to save for travel expenses in a tax-advantaged Roth individual retirement account, which allows for tax-free distributions after age 59 ½.
The Bottom Line
Living the travel lifestyle in retirement is a lofty goal and it’s one that requires some prep work beforehand. 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 you’d like to visit may allow you to stretch your travel savings further in retirement.