Ensuring lifetime income
Before booking a one-way airline ticket, Sheila will need to determine how much she can afford to spend while still having enough savings to fund the rest of her retirement when she eventually returns to the U.S. She may want to consider engaging a financial planner to determine the best withdrawal strategy, but she could begin planning by employing the commonly used 4% rule.
This rule would see her withdraw 4% of her income in the first year, and then the same dollar amount plus an adjustment for inflation each year after. This rule is generally estimated to allow for your savings to last about 30 years. At 66, Sheila has a life expectancy of about another 19 years, so she’ll want to make sure her money lasts at least that long.
Employing the 4% rule gives Sheila $16,000 per year, before adjustments for inflation. She also receives $1,563 per month from Social Security ($18,756 per year), so she’s working with a total income of $34,756. U.S. citizens living abroad must still file and pay taxes, so she’ll need to adjust the total for any taxes or refunds.
Medicare doesn’t typically pay for medical expenses outside the U.S., so Sheila will need to decide whether to drop her Medicare Part B (she’ll need to research her options, since she may owe to penalties when she re-enrolls). She might want to keep it, if she plans on briefly returning to the U.S. throughout her travels. But to cover medical expenses abroad, she’ll need to buy private travel insurance and factor in this expense each year.
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Discover the secretManaging expectations and budgeting
Once Sheila has determined her annual income, she can start budgeting for travel. Her main expenses will be accommodation, transportation, food and activities — and if she wants to continuously travel for 10 years, she’ll need to stick to that budget.
These expenses will vary greatly depending on where and how she plans to travel. For example, notoriously pricey Switzerland could bust her budget, while she could live it up on a shoestring in parts of Southeast Asia.
Wherever she travels, staying in hostels or family-run guesthouses and taking local transportation will be cheaper than staying in hotels and flying between cities. But, if that’s not her style, she could also consider short-term rentals where she can save money on food, laundry and other expenses.
The biggest risks Sheila will face are inflation and currency fluctuations where she travels, which could make her expenses higher or her money worth less) than she anticipated. As she ages, her risk of a medical event — and the associated expenses — also rises, so she’ll need to set some funds aside in her budget for emergencies.
While $34,756 may not go far in the U.S., if Sheila choses destinations wisely and budgets carefully, it may be enough to carry her on some great adventures.
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