Going on Vacation? Budget and Never Dip into Retirement Accounts

If you’re one of the 8 in 10 Americans who planned to take a leisurely vacation, you probably already know that it will be pricey. Consumers say they will spend an average of $941 per person, or $4,705 for a family of five, on trips this year, according to a recent survey. How will you cover that tab without breaking the bank or impacting how you invest for larger goals, like retirement?  

By planning well and planning in advance, says Dara Luber, senior manager of retirement at TD Ameritrade. “Do what you can afford and make sure your plans don’t put you into debt,” she says.

Three-quarters of traveling Americans already have socked away money for this past summer’s jaunt, according to the most recent American Express Spending and Saving Tracker. While that underscores a more frugal approach to spending than, say, 10 years ago, that number is significantly lower than last year when 81% of those polled had set funds aside. More upbeat, however, is that 91% say they are employing specific cost-cutting measures like driving instead of flying, finding better deals with deeper research, or planning shorter trips.

But what if you suddenly get an opportunity for a big vacation that you haven’t saved for? Should you ever take money out of 401(k) or a brokerage account to finance that whim?

“Some people save in brokerage accounts and might use (investment) proceeds,” to fund a trip, Luber says. “Just be sure to never take money out of a 401(k) or retirement account. There are tax implications plus the potential hit of the 10% penalty for early withdrawal.

“That money should be earmarked for retirement only,” she says.

Instead, she says, start planning early, chart out the trip and the associated costs for travel, housing, food and drink, activities, and even tchotchkes. And if you’re going to use a credit card, as only 15% of those polled recently by CreditCards.com say, be sure you have the cash to pay it off in its entirety when the bill comes due—both to avoid the debt and the interest-rate charges.

“Create a budget, figure out what you can afford and stick to that,” Luber says. “And get the kids involved. You want them to have that time together with the family, but also understand what these vacations cost. It helps them participate and gives them a good money lesson at the same time.”

She knows of clients who have used a number of different strategies to save: One put $5 bills in an envelope whenever she had one; another had a separate savings account that she fed monthly for excursions; and another had everyone in the family regularly put their change into a big jar throughout the year as a way to collect spending money for the trip.

“If there’s $100 in the jar, then each kid gets $50,” Luber says. “If they spend it all on the first day, then they’re done for the week. That teaches them budgeting.”     

Whether you’re saving for a vacation or for something bigger like retirement, it’s important to define your goal and put a plan in place to help you achieve it.

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The information presented is for informational and educational purposes only. Content presented is not an investment recommendation or advice and should not be relied upon in making the decision to buy or sell a security or pursue a particular investment strategy.