Forbes – August 19, 2020
“Enjoy life while you can. You just never know how long you’ll be healthy.”
I hear this statement frequently from family and friends of mine who travelled during the initial years of their retirement, while they still had the health and vitality for such activities. And yes, there’ll come a day when we can all safely travel again!
With a careful plan, you can spend money on travel and not worry about outliving your savings. Getty
If travel is on your retirement bucket list, you might be wondering how you can spend more money on travel without jeopardizing your long-term financial security. You don’t want to blow all your money on that “trip of a lifetime” and then end up broke in your later years. Planning for future travel in a responsible way could be a good use of your time now while sheltering in place.
The “travel fun bucket” idea
Here’s one solution to consider: Set aside a “travel fun bucket” to cover anticipated travel expenses in your first years of retirement. Be sure to segregate this bucket from the savings you’ll use to generate your ongoing, lifetime retirement income, for reasons that will soon become clear.
The amount of savings you’d want to put in your travel fun bucket should equal an estimate of the amount you might spend on travel in the first five or 10 years of retirement, or longer if you think you’ll still be traveling that long. Then calculate the amount of lifetime retirement income you’ll have from all other sources, such as your retirement savings (after you set aside your travel fun bucket), Social Security, pensions, annuities, etc. Make sure that your ongoing retirement income can still realistically cover your basic and discretionary living expenses. If they can, then you can feel comfortable spending the extra money in your travel fun bucket.
Learn by example: See how Jack and Mary will fund their travel adventures
Jack and Mary are a hypothetical couple, both age 65, and on the verge of retiring. They estimate that their savings and Social Security will generate an ongoing, lifetime retirement income of $55,499 per year. They plan to use a portion of their savings to fund a Social Security bridge strategy that will increase their lifetime retirement income. Also, they will use the IRS required minimum distribution (RMD) method to determine the annual amount of retirement income that their retirement savings will generate.
They’d like to spend an extra $5,000 per year on travel during the first 10 years of their retirement. To pay for these anticipated expenses, they should set aside $50,000 ($5,000 multiplied by 10 years) from their retirement savings in a separate travel fun bucket.
If they reduce by $50,000 the amount of their retirement savings that will generate their ongoing retirement income, their income will decrease by $1,563 in their first year of retirement (using the current RMD methodology). Each year in the future, their lifetime retirement income would decrease by similar amounts, depending on their future investment performance.
Based on the figure above, Jack and Mary estimate that their total annual retirement income in the first year of their retirement would decrease from $55,499 to $53,936. The amount of their retirement income in future years would be similar, although cost-of-living adjustments will increase their income, and investment performance will impact the amount of retirement income generated from their savings.
Jack and Mary estimate that they can cover their ongoing living expenses (not counting the extra travel expenses) with a lower annual income of $53,936. Based on this analysis, they feel confident that they can spend extra money on travel without jeopardizing their lifetime retirement security.
Some implementation details
The funds for your travel fun bucket don’t necessarily need to be physically withdrawn from retirement vehicles in order to separate them from your retirement savings. Instead, you could simply establish this bucket as a separate investment account within an existing plan.
Additionally, you’ll most likely be making withdrawals from your travel fun bucket in the earlier years of your retirement, so the money will have a relatively short investing horizon. Since that’s the case, you could invest these funds in short-term bond funds or conservatively invested balanced funds. Any interest and investment earnings on your travel bucket fund can increase your future withdrawals from the travel bucket.
One more thing: If you don’t end up using all the money in your travel fun bucket, you can always add it back to the savings that are generating your retirement income, or you can use it to replenish your emergency fund.
A travel fun bucket is just one example of the kind of refinements you can make to personalize your retirement income strategy in order to meet your specific goals and circumstances. No matter how you decide to use your money, it’s a good use of your time to develop a careful retirement income strategy that supports the life you want in retirement.
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