If you ask people over the age of 55 what they want to do with their life after they retire you’ll get a large range of similar answers. Some folks plan on writing a book or learning a new language. But by far, the most sought after retirement dream is to travel. Sure, the idea of seeing the world seems great, but there’s actually lot to consider before you start packing your bags.
Is retirement travel realistic?
If we examine the average life savings of a retired person we usually end up with about $172,000 dollars in the bank. This might sound like a lot of money up front, but if you’re hoping to cruise around the Bahamas or take an extended tour through Europe after retirement, this may not be nearly enough.
Let’s break it down even further. Most American households make about $53,000 dollars per year. Which in many cases is hard enough to live on when on average we are all about $130,000 dollars in debt. So, looking at $172,000 to last us over the span of 30 years is just not possible. Each person would be left with only about $5,733 dollars to spend each year. With a partner you’d have about $11,466 dollars per year. Needless to say, this is not even remotely a liveable or “travelable” wage.
What do I need to know about retirement funds?
Although this may paint a less than hopeful picture, there are definite ways to make your retirement dreams come true. First, understanding how retirement accounts work is absolutely essential to retirement savings success.
Start saving now. The first thing to do if you who wish to travel later in life is save as much as you can, whenever you can. If you aren’t already making contributions to a 401(k) or IRA account, look into it. Most employers not only help you get an account set up, but they will match any contributions made by you during your employment with the company. Even an extra 1-2% match by your employer will add up over time. So, this is something to take advantage of whenever possible. Even if the company you work for isn’t going to be your forever career, you can still take your retirement assets with you if you switch jobs.
Secondly, any retirement saver must understand that any funds put into a 401(k) or IRA account may not be withdrawn until the age of 59 ½ in the US. Employers that contribute to such a fund often have a statute of limitation that explains employees will not have access to the funds they have matched until retirement age has been reached. Okay, so in some cases you can take out funds early if you really need to, but at what cost? Well, you’d be looking at about 10-20% taxation on any amount of funds removed before your 60th birthday. Yeah, ouch.
Lastly, there actually is a limit on how much money can be saved away in a 401(k) and IRA each year. In the US that number is $18,000 for 401(k) in 2016 and has stayed the same for several years. For an IRA you’re looking at a max of 5,500 per year. If you’re running the numbers with us you might realize that if an individual is able to make the maximum contributions each year to a 401(k) for 30 years they would end up with about $540,000 dollars. Again, this seems like a lot up front, but over 30 years of retirement you’re still looking at $18,000 dollars per year to live off of. If you have a partner you might have about $36,000 per year – still very low for travelling.
How do I make this dream come true?
Track what you spend your money on. Anyone of any age should know exactly where their funds are being used each month. Although, as we age it may become even more important to deposit additional funds into a retirement account where possible. An extra $5 dollars per month over 30 years adds up to $1,800 dollars, or over 40 years becomes $2,400 dollars. That could pay for one entire vacation trip in itself. Hence, taking a detailed look at your expenses can show a trend of overspending in unnecessary areas. Now, this isn’t to say “don’t spend money on fun activities”. Just be cognizant of spending money on things that you don’t need, won’t use, or don’t have room for – we are all guilty of it.
Do not withdraw money before the designated age. It may seem appealing to bail yourself out of a bind with a few thousand dollars, but as explained above, the taxation on early withdrawal is devastating. Not only will it take a large chunk out of the money you expected to withdraw, but Your account will be shorted that much more for retirement. If you find yourself in a serious need of money, have a talk with your bank about a small personal loan. The interest rates will be astronomically lower than any tax fees removed from early withdrawal retirement funds. Of course, if you can help it, steer clear of any and all additional loans whenever possible. A good rule of thumb is, if it’s not crucial to your current quality of life – you probably don’t need it.
You are not limited to just one account. Any one person can have a 401(k) and an IRA account if they so choose. Contributing as much as possible to these accounts each year can undoubtedly attribute to a comfortable retirement. You can also make additional “catch-up” contributions each year that do not count towards your yearly contribution maximums. Just doing what you can, when you can truly makes a whole world of difference.
I know all of this talk about savings this is always easier said than done when nearly all of us have debt to take care of. It’s either that or credit card debt, home loans, car loans, medical expenses – the list goes on. However, it isn’t impossible. Refinancing or consolidating debt might be a great first step in order to make your loan payments manageable. Many successful folks have come out of hundreds of thousands of dollars in debt just by approaching the loans appropriately.
Those who plan to travel later in life are faced with some tough decisions in regards to debt. Making these types of choices early on could save exponentially over the years. If traveling across the world is something you’d rather not live without, try to scale down as much as possible. Living in a smaller home with a smaller monthly payment could potentially save hundreds of dollars per month. Same goes for other luxuries like new cars. Choosing an older model of car is nothing to be ashamed of, especially when you’re sipping tropical drinks on a beach because of the money you were able to save.
Traveling after retirement is not just a pipe dream, but it does take careful planning and dedication. Do as much research as possible about the retirement accounts at your disposal. Understanding how those plans work and the amount of contributions you can make is essential to your success. Furthermore, living a modest lifestyle from your 20s to your 50s could certainly mean living the high life in your 60s and after. If travel is your goal, just remember to live within your means, don’t take on new debt, and save whenever possible.
After all…
“a dream without a plan is just a wish.” – Katherine Paterson
If you have any saving tips, please share below!
