Forget retirement savings. Travel the world
One young reader plans to spend 15 months crisscrossing the globe. Our expert offers a short-term savings strategy.
NEW YORK (Money) -- Question: I'm 26, single and have no student loans, credit-card debt or car payments. After much consideration I've decided to forego saving money for a house or retirement for now and instead use my savings for a 15-month around-the-world trip in 2009 while I'm still young.
I've saved $14,000 this past year and am looking to save another $20,000 for the trip, plus $10,000 for a cushion when I return.
I was considering putting part of my savings into a Roth IRA, but the five-year withdrawal rule nixed that option. Since I will be leaving in two years, my risk tolerance is not very high. Aside from CDs, what are some good options I should consider to keep my money growing in the interim?
- Jorge Perea, Salt Lake City, Utah
Answer: I know that most of the time I preach the virtues of getting an early start on retirement savings to people starting out in their careers. But planning for your financial future doesn't preclude taking the kind of global jaunt that you have in mind.
Indeed, if you're young and have the time and the money to do something like this before the demands of career and family limit the opportunity for such extensive travel, my feeling is go for it, man.
I myself backpacked through Europe for three months back in the mid-70s before settling into my career, and I still value such experiences as strolling through the Uffizi Gallery in Florence, the Edvard Munch Museum in Oslo and, of course, sampling local wines, beers and spirits whenever possible (to deepen my understanding of the cultures, of course).
So where should you be stashing your around-the world travel fund? Well, since you're planning to leave in two years, you can't take a lot of investing risk with this money. The last thing you want to do is plow your savings into stocks funds only to find yourself in the middle of a market meltdown at bon voyage time.
So we're pretty much talking about funneling your savings into money market accounts, short-term CDs and perhaps a bit in ultra-short-term bond funds. (Click here to find the highest-yielding CDs and money-accounts, and here to search for ultra-short-term bond funds.)
You won't be earning much of a return - maybe an annual 4 percent or so - but shooting for big gains isn't the object here. What you really want is assurance that your money will be there when you're ready to start globetrotting.
Prior to your trip, you may want to consolidate the money you estimate you'll need into accounts at whatever bank you normally deal with. This way, you'll be able to use ATMs abroad to get at your money as you wend your way across the map. Ideally, you should keep as much of your stash as possible in interest-paying accounts so you continue to earn at least some return on your savings. If such accounts aren't accessible through an ATM, you can arrange ahead of time for online banking privileges and then make occasional online transfers from, say, your money-market or savings account into your checking account, which you can then tap at an ATM.
Before you go, however, I want to set you straight on how withdrawals from Roth IRAs work. It's true that in order to withdraw investment earnings in a Roth IRA without tax or penalty, you must have had the account open at least five years and you must be 59 1/2 or older. (There are ways to sidestep the penalty, but they don't apply to your situation.) But as far as your Roth contributions are concerned, you can withdraw them at any time without tax or penalty. (For a rundown on the taxation of Roth withdrawals, click here.)
So if you don't mind being limited to pulling out only the amount you've actually contributed to your Roth, feel free to invest some of your savings in a Roth account. In fact, it might not be a bad idea. You can think of your Roth contributions as a last resort, the place to go if all your other savings have run out. If it turns out you don't have to tap them, you've got a nice retirement fund waiting for you when you return. And even if you do have to withdraw what you've contributed, you'll still have the earnings sitting in your account, giving you at least a bit of a start toward retirement.
Starting early for early retirement
Next stop - Roth IRA
Ask Walter a question: Click here or e-mail us at firstname.lastname@example.org.
Have you retired recently? How are you coping with money issues and all the extra free time? Tell us your story for an upcoming feature in Fortune Magazine. Send e-mails to email@example.com.