By Carl Lachman, CFP®, MBA 

Time to Get Away!

I like to travel. Sometimes I get away with my wife, and sometimes we take our kids. We enjoy the time we get to spend with each other, but we also enjoy seeing new places, learning about new things, and eating food we don’t get to eat at home. Plus, the change of pace gives our minds and bodies a chance to refresh and relax.

The Travel Money Fund

We are not retired, and the amount of money we spend to travel is determined pretty simply right now. After all expenses, taxes, and savings are taken care of, if there is a little left, we put it into our travel savings.

When it comes time for a trip, we spend what we can. If we have saved more, the trip might be a little nicer. If we have saved less, the trip might be shorter or simpler. We spend what we have and try to avoid using credit cards.

Funding Travel When Retired

When you are working and have monthly income, putting a little aside for travel is a rather easy way to make sure you don’t spend too much on your vacation. But, when you retire, figuring out what to spend on a discretionary item like travel is a little harder.

Being retired usually means you have stopped working and no longer have monthly earned income. You have decided that you have all of the assets and savings you need so that you do not need to work for the rest of your life.

You don’t want to run out of money, and you are spending money conservatively—so how do you decide how much to spend for traveling? It is a harder question to answer. It is not as simple as just making a retirement travel budget. I will try to help you figure this out with the steps I explain, below.

Run a Retirement Projection

In our fee-only financial planning practice in Fullerton, California, we run conservative retirement income projections all the time for our clients. A projection helps our clients with all sorts of financial decisions in retirement. It frames a question about spending money in retirement like this: “If I spend $XX,XXX now, how will that impact my retirement income for the rest of my life?”

Our retirement projections take into account all assets available for expenses, but typically leave out the primary home. We assume a rate of inflation and a rate of investment return. We count all pensions, rental income, and Social Security as part of the annual income.

Then, we calculate the maximum amount that could be withdrawn from investment accounts each year until the client’s money runs out at 95 years old. This is done with the help of a computer program that solves the annual takeout, with all of the assumptions for each year until 95.

Our retirement projections are very good, but we remind our clients they are just a good guess. The numbers are usually pretty accurate for the next few years, but we know the numbers we project 10 to 20-plus years in the future are going to be different.

So, we revisit the retirement projections with our clients every three to five years. The projections are very helpful directionally; they tell you if you are on track.

Include All Income and Property Taxes

Our projections give a number for each year’s expenses, including taxes. We don’t tell our clients how much to spend—we tell them the maximum amount they should not exceed for all expenses, including taxes. (Don’t forget about taxes when you look at the maximum you can spend each year in retirement!!)

Keep a Full Emergency Fund

Besides your monthly expenses and taxes, make sure you are contributing to an emergency fund and keeping it full. Your emergency fund should be a savings account with three to six months of living expenses set aside.

Contingencies

Pad all of your numbers, at least a little. What do I mean? Assume there will be unexpected emergency needs for money. Make all of your assumptions a little conservative when you run a projection. Err on the side of assuming a little less in income, a little more in expenses, a little more in taxes, etc.

Spend Conservatively Early in Retirement

When you retire, you are free! You are ready to have fun! You want to travel! But, as a financial advisor, I am going to do my job and tell you to take it easy. Slow down. Be a little cautious. You probably shouldn’t do all the fun stuff immediately.

The problem is if you miscalculate and spend too much early in retirement and your investments perform very poorly, you might put yourself in a permanently bad financial situation. Remember, you are done working, and getting a job again is going to be hard. If you spend too much early in retirement, you might not be able to recover very easily.

So, when considering your travel spending, be conservative and spend less—not more—than the best financial projection suggests.

After you make it through your initial five to 10 years in retirement, you will get in a new financial pattern and be able to perhaps be a little less cautious in your spending. You will understand the limits of your financial resources, and you will be better at making spending decisions. Until you get there, be conservative in your retirement spending on travel.

Now, Spend What You Want on Travel

If you have run a retirement projection, used conservative assumptions, included your investment assets (but not your house), included all income sources, included inflation and conservative returns, assumed an annual takeout from investments, included the cost of taxes, are keeping an emergency fund full, added a little for contingencies, and are spending less than the projection says you can, then determining your retirement travel budget is easy: Spend whatever you want—as long as that amount on top of all other expenses is still less than the projection says you can spend.

A good retirement projection that takes these factors into account should give you confidence and freedom. You now know the limits of your spending in retirement, and you have the confidence that you won’t run out of money.

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