Budgeting for European Travel in Retirement

In planning your retirement budget, it’s easy to factor in fixed expenses, but travel is a discretionary expense. It’s not like paying for housing or health care. The very first thing to consider when budgeting for European travel is how much you’re willing to spend on enjoying new experiences. It’s impossible to say how much of your retirement budget should be allocated to travel. It’s also hard to measure your return on investment in travel. The rewards are experiences, rather than financial gains. 

There’s probably not a fellow retiree who doesn’t think about how to balance spending versus conserving their wealth. For our household annual spending plan, we go through a very specific process, developed over years, that works very well for us. We thought we would share our process with you since it has allowed us to travel extensively while feeling confident that we will continue to conserve enough money to maintain a high quality of life for the rest of our lives.

A first step is to identify financial goals. Our financial goals are to 

• maintain a portfolio balance at or above our projections,
• spend without trepidation, 
• maintain a solid understanding of our spending habits and flexibility, 
• and to sleep soundly each night knowing that we are spending in an optimal way. 

We work with a certified financial planner to achieve these goals and recommend that you consider doing the same. 

An optimal budget for us includes spending 6 to 9 months per year in Europe. That’s a lot of time away from our home. Our budget has to include not only paying for our travels, but maintaining our home in Florida and paying for costs that arise from being absent, such as paying more for homeowner’s insurance because we aren’t living in our home 365 days a year. 

Creating Portfolio and Lifestyle Cushions

Our personal strategy to feel confident in our spending plan each year is to build portfolio and lifestyle cushions into our budget. 

A portfolio cushion means that our investment portfolio balance is always higher than our projected balance. The cushion equals the actual portfolio balance minus the projected balance. We focus on being conservative (as opposed to accurate) in our projected spend down. Our projections are really our worst case scenario, not our optimistic hopes for our portfolio.

A lifestyle cushion includes things that we spend money on and enjoy, but that we know we can do without if the economy declines. The cushion is the money allocated to those extra discretionary items. There are many things on our list of discretionary spending, and we have priorities that would determine which items would be eliminated first if it became necessary to scale back our spending. 

Spending in retirement is all about the balance between the money coming in (e.g. how your investments grow, pensions, social security) and what you spend to live and enjoy. We meet with our financial advisor quarterly to review our situation. We discuss current spending and earnings as well as future projections. We’re both 60 now so, at this time, our income stream is entirely from our investment portfolio. When we reach age 65, our retirement income stream will consist of a pension as well as distributions from our investment portfolio. Medicare will also be an option at age 65, and that will reduce our health care expenses, as we will no longer need to pay a high premium for health insurance. Sometime between ages 67 and 70, we’ll each draw social security. When you create your projections, consider these types of future changes. You may also be certain that you have an inheritance that will be bestowed in the future. Consider that in your projections. 

If you have a financial advisor (or decide to get one soon), you’ll discuss things like maximum annual portfolio withdrawals and ideal portfolio allocations (e.g. x% equities, bonds, etc). A conservative withdrawal strategy is to spend 4% from the investment portfolio each year. The reason 4% is used by planners is that it is an estimate of minimum investment growth. However, our portfolio has grown an average of 9% each year over the past three years. In the trailing 12 months, one of our brokerage accounts has actually made 25%! We have felt comfortable withdrawing at a rate greater than 4% over the past few years, because the market has replaced money faster than we’re spending money. Our balance has remained the same, even though we have lived solely off of the portfolio for the past 3 ½ years. The portfolio and lifestyle cushions add to our confidence in being able to maintain our portfolio at a desirable balance over time. We know we have room to adapt our spending if the economic situation worsens.

Portfolio Cushion

In a bull market of 9-25% gains, our investment portfolio has grown beyond our projections, allowing us to spend more than the very conservative 4% strategy. It’s a constant balance between creating a portfolio cushion and having more fun. If we only take 4%, we’ll continue to amass more money for later, but we’ll be foregoing spending on enjoyable activities now during our active, healthy years. As such, we have to make spending decisions. 

Several factors play into our decision-making about how much to withdraw from our investments monthly or quarterly. They are:

• The rate at which the portfolio has grown over the preceding 12 months.
• Knowing that we have a pension that kicks in at age 65
• Anticipating that we will draw full social security somewhere between ages 67 and 70
• We have no children to leave an inheritance

Think about your situation – future revenue streams, desired balance to leave heirs or charities, etc. Factor these into your planning to increase your comfort level in spending each year. It can be hard to move from a “saving” for retirement mindset to a “spending” in retirement position. 

When we first began exploring the idea of early retirement at ages 56 and 57, we created a spreadsheet to project our portfolio balance for the next 20 years. Our financial advisor could have done this for us, but we wanted to explore a number of options and doing it ourselves helped us develop a better grasp of our situation (disclaimer: our financial advisor also provided projections which helped us make our retirement decision). 

We decided that a slow decline strategy best meets our goals for our investment portfolio. We are okay with ending life with little or no money in our portfolio. We aren’t worried about running out of money, because our future income includes a pension with survivorship and social security.  In our projections spreadsheet, we used an annual 4% growth and 7% withdrawal formula based on the value of our investment portfolio on January 1 each year with a simple math approach ignoring month-on-month investment growth. 

This method is very unsophisticated and is probably more conservative than it is accurate. Our bottom line was that we wanted to see that we would not run out of money, and this simple strategy makes us feel secure. Quicken or another program can provide much greater accuracy, but this is how we are doing it to understand our situation.  

*Portfolio balance + 4% - 7%  = Ending portfolio balance

At age 65, spending may decrease to reflect the option to enjoy Medicare, rather than expensive premiums for health insurance. Suppose you also decide not to work anymore after age 65. Perhaps you start receiving a pension at age 65. Between ages 67 and 70,  add in social security. Suppose social security receives a cost of living adjustment of about 1.3% each year.  You can project your annual income each year as follows: 

The table provides an important visual for us to determine how much we have available to spend each year. Rather than sticking rigidly to a 7% withdrawal, we consider the projected balance for our portfolio versus the actual balance.   We feel most comfortable if our portfolio cushion is at least $50,000. Why a cushion? Because as our financial advisor reminds us, some years may not return even 4%. If a recession occurs, we could even lose money in our account. Therefore, we build in a cushion to avoid over-spending our projected balance at the end of the year. The bigger the spending plan, the bigger the cushion should be. 

Lifestyle Cushion

Examples of lifestyle cushion items include

• Dining out
• Business or first class air travel
• First class rail travel
• Spa treatments (massages, hair color, pedicures, manicures, etc)
• Premier lodging while traveling
• Personal trainer and gym membership
• Shows, movies, and other entertainment
• New clothes
• Golf and tennis lessons
• Home improvements and upgrades
• Home services, such as housekeeping and landscaping

If our investments are doing well, we spend on all of the above niceties. With a roaring bull market, we were able to take out distributions of about 10% of our portfolio annually over the past three years. Spending beyond our initial projections allowed us to supplement our monthly spending on extensive European travels in a style that was very comfortable for us. Our investment balance has not fallen below projections + cushion, and we have enjoyed lots of travel, home renovations, and other spending extras. Most importantly, we spend confidently and with no worries about whether or not we can afford our lifestyle. 

The above is the process we use to balance spending versus conserving our portfolio. It is a process that has worked for us and helps us feel absolutely comfortable and confident in including travel and other discretionary spending in our retirement budget. Again, this strategy is incredibly simplistic, but it allows us to continually compare our balance to projected amounts. If the economy takes a nose-dive, then we can quickly determine when we’re in a danger zone (i.e. falling below projections) and make adjustments to both our withdrawal rates and our lifestyle.

Keep in mind that financial advisors can give you a very contextualized analysis that will provide broader information for your decision making.  We highly recommend enlisting the expertise of an advisor.

Disclaimer: We’re not financial advisors/experts. You should consult with your own financial advisor throughout your retirement years on a regular basis to continue to create and enjoy your wealth.