Fund Your Dream Retirement Travel With a Responsible Financial Plan

The closer you get to retirement age, the more you might dream of all the wonderful places you can go. Maybe you've always wanted to take a sailing trip around the Caribbean, go on a cruise around the world, or rent an apartment in Paris for a few months, yet you never had the time.

In retirement, however, you can have plenty of time to experience your dream vacation. But to make sure you can afford a once-in-a-lifetime trip without sacrificing other retirement goals—e.g., turning a passion project into a small business, joining a nonprofit board, taking care of family members—you need a strong plan.

That includes picturing what you want your dream vacation to look like, accounting for your travels as part of your retirement expenses, and setting a long-term financial strategy that can help you achieve your goals.

The ideal retirement: Envision the lifestyle you want

The more you can envision what you want your retirement lifestyle to look like, the easier it generally is to build a financial plan that makes that dream a reality. That’s because your financial needs can vary significantly based on your goals.

For example, if you plan to travel for half the year while living near your family for the other half of the year, then you’d likely need a larger travel budget than if you just took one week of vacation per year. Your tax strategy might also differ depending on where you live and whether you’re a full- or part-time resident of a given state.

You also might dream of living out of the country for several months of the year. That could inform choices such as tax planning and currency hedging.

Suppose you want to travel across Europe for several months out of the year in retirement. In that case, you probably wouldn’t want the dollar to depreciate against the euro and then face higher costs during your travels.

So, your financial plan might involve safeguards like holding some investments in European companies. If the eurozone economy rises, you might experience investment gains that offset some of the higher costs of retirement travel.

Plus, picturing your ideal retirement can make it easier to stick to your financial plan. If you know what the payoff will be for growing your retirement savings for however many more years you have until your ideal retirement age, then you might be more motivated to stay the course, rather than using some of that money for less ideal vacations now.

Retirement expenses: Unlimited time, limited funds

While you'll probably have way more free time in retirement than you have during your working years, you also might not have as much stable income. Rather than getting a regular paycheck from your job or taking a consistent owner's draw from your business, you might have to pull money from your pool of retirement savings. Yet you need to make those savings last the rest of your life.

That's not to say you have to be stingy, but you need to plan ahead so that your retirement portfolio can cover your ideal retirement expenses, including your dream vacations, as you make the most of all your free time.

Don't assume your cost of living will decrease dramatically in retirement. If you want to figure out how much your expenses will be during this stage of your life, use your current spending as a guide. So-called "wealthy and healthy" households only experience an average decrease in consumption by 0.3% per year in retirement, according to the Center for Retirement Research at Boston College.¹

If you want to spend more money on travel while keeping your overall expenses stable, break down your estimated costs in retirement. Keep in mind that some expenses might change later in life.

For example, only around one-third of Americans ages 65-74 hold mortgages or home equity loans.ⁱ In comparison, 53% of those ages 45-54 have this type of debt. So, depending on your real estate situation, you might be able to replace mortgage payments with plane tickets and hotel reservations in retirement.

Other costs, however, like healthcare, might increase. On average, a 65-year-old pays $21,400 out of pocket per year for health services, aside from insurance premiums. In comparison, 90-year-olds spend $36,600.ⁱⁱ These costs can differ significantly though, due to factors such as your health and whether you have supplemental insurance.

So, before you go buying a timeshare or booking a big getaway, consider what your expenses might be. Speaking with trusted professionals such as your primary care doctor could help you get a better sense of your long-term health outlook. That way, you can calculate if healthcare expenses will likely fall above, below, or in line with median costs.

Then, compare your estimated expenses to what your retirement savings can provide in terms of annual income.

If your income exceeds your expenses, you might be comfortable planning ahead to use that extra money for travel. If there's a gap, then you might need to adjust your financial plan. You might consider increasing your retirement contributions or waiting to take Social Security benefits until age 70 to maximize delayed retirement credits.ⁱⁱⁱ

Retirement income: Turn savings into payments

Analyzing your retirement expenses goes hand-in-hand with figuring out what your retirement income might look like. First, you can add up known retirement income sources, such as the following:

• Social Security
• Pensions
• Annuities

These retirement income sources can provide consistent monthly payments without much sweat on your end. The trickier part might be calculating what other pools of money can provide retirement income. For example, if you have a 401(k) or IRA, your monthly withdrawals might change based on how much your investments rise or fall.

This uncertainty causes some retirees to turn to products like fixed annuities that provide regular income. However, these products also carry risks, like limiting your retirement income more than if you managed withdrawals from your own pool of retirement savings. These products might also increase inflation risk.

"Payments in a fixed annuity typically do not have cost-of-living adjustments to keep pace with inflation, so the value of the money you receive in your payments may decline over time. Annuities with inflation protection can be purchased, but the cost, in general, is significantly higher," notes FINRA.^iv

Instead, you might use online retirement calculators or speak with a financial advisor for more in-depth analysis of what your variable assets can provide in terms of retirement income. You can input your savings and output your expected income based on assumptions such as annual investment returns, withdrawal rate, and years spent in retirement.

After looking at these projections, you can decide if using rules of thumb—like withdrawing 4% of your retirement portfolio per year—works for your situation. Some investors, however, might want to withdraw more or less than that, depending on factors like income needs and the size of your overall portfolio.

Once you have a good sense of what your retirement income might look like, you can compare it with your retirement expenses and see where your dream retirement travel fits in. You also might decide to adjust your investment strategy to align with your goals.

For example, if you need more stable monthly income to afford a new mortgage on a vacation home in retirement, but you don't want to buy an annuity, then you might prefer to shift your portfolio toward fixed-income assets that yield consistent interest payments.

In general, investors often derisk anyway by shifting from stocks toward bonds as they get closer to retirement, but you might accelerate that move if you're worried less about growing your retirement savings and instead want to protect your assets ahead of retirement.

Financial plan: Establish a long-term strategy

If you want to travel and stay at dream resorts around the world, it's important to plan ahead and think long term. You probably wouldn't want to burn through most of your retirement savings the first few years after working and then have to significantly pare down your retirement lifestyle.

Instead, you can establish a plan to enjoy life for decades in retirement and perhaps still pass on savings to your family or philanthropy.

When constructing your long-term plan, combine the steps:

1. Picture your ideal retirement lifestyle
2. Estimate retirement expenses
3. Calculate retirement income

Construct your long-term plan to build alignment amongst these three areas. If your retirement income falls short of what you'd need for a retirement lifestyle that involves moving, for example, then your tax strategies might change based on where you plan to retire.

If you want to move to a state with relatively high-income taxes, then you might take steps like initiating a Roth IRA conversion before retirement. That way, you can have more post-tax money to use in retirement, enabling you to stretch your money further for your dream vacations.

And if your estimated retirement expenses fall short of your projected retirement income, you might adjust your financial plan to include additional income streams in retirement. Perhaps you'll invest in real estate to gain rental income that can fuel additional retirement travel.

Your financial plan might also involve creating different buckets of money that you can use in retirement. For example, you might decide to keep some money in stocks within your brokerage account, even during retirement, as you might want to eventually use those funds for your grandchildren’s college tuition. If you have plenty of time until that happens, then you might be comfortable riding out stock market volatility while trying to maximize long-term gains.

Meanwhile, you might use approaches like earmarking Social Security income for travel. Whatever you get each month in Social Security can go directly toward saving for a trip, and then you don’t have to worry about selling investments to fund vacations.

And even though you generally want a long-term strategy, that doesn't mean you should never revisit your plan. Conducting annual reviews with a trusted financial advisor, for instance, can help make sure you’re on track to reach your retirement goals. These reviews can also be good opportunities to rebalance portfolios as needed.

Travel the world: Plan your dream vacation

Having a solid financial plan can make your dream vacation come true, but don’t just focus on paying for the trip. Go beyond the costs of dream resorts and plane tickets. Consider the experiences you want to have during your travels and design your trip accordingly.

For example, 96% of travelers think it's at least slightly important for their spending to make "a positive impact in the places they visit," finds a global survey from Kind Traveler.^v Yet nearly half think finding environmentally friendly and socially conscious accommodations "is the hardest part about traveling sustainably."

So, if these types of issues align with your travel wishes, consider researching destinations based on these merits, not just cost. Kind Traveler is one such resource that curates sustainable hotels. You can also view the emissions of different flight options via resources like Google Flights.

Planning a more socially conscious trip can take you beyond guidebook recommendations for greater cultural immersion. You can even combine souvenir-hunting with getting to know the locals.

To shop ethically, for example, you can "go straight to the source and meet the artisans whipping up those Peruvian blankets, Appalachian straw baskets, or Japanese paper lanterns. It's even more meaningful if you learn a little about artisans' work and lives by taking a short class," notes National Geographic.^vi

Overall, your dream vacation is likely more than checking something off your bucket list. It's about enriching your life and perhaps the lives of others. Planning ahead can help you get there financially and logistically, but leave room to experience the unexpected and be present for whatever your travels bring.

To learn more about retirement planning and saving for your dream vacation, please reach out to our team of financial advisors at Santander Investment Services.