Note: I originally published this article in the AARP Bulletin.
Carla McDowell has always loved to travel. She’s toured the Soviet Union, Germany, the Netherlands, Switzerland, South Korea, Costa Rica, England and Alaska. And like a growing number of Americans, she always purchases travel insurance. “No one wants to get sick and cancel a trip,” says McDowell, 64, of Omaha, Nebraska, “but insurance gives me peace of mind that I won’t lose a lot of money if something unexpected happens.”
Travel insurance has been around for decades, but the industry has grown rapidly since the terrorist attacks of 2001, reaching sales of more than $1 billion. Before 9/11, only about 10 percent of Americans taking cruises, tours or international trips bought travel insurance. Today that number is around 30 percent, according to the U.S. Travel Insurance Association (USTIA).
About 80 percent of those policies are “per trip” policies that cover the three most common sources of trouble: canceled or postponed trips, medical emergencies, and lost or damaged baggage.
Should you buy travel insurance to protect your travel investment? Here are several points to consider before you decide.
What’s covered? Terrorism? How about hurricanes? The answer, of course, is maybe. Some policies may exclude terrorism or “acts of God” altogether; others offer broader coverage. For hurricanes, your policy may apply only if you purchased it before the storm was named and then only if your destination is under a mandatory evacuation order.
Bottom line: Read the fine print carefully before you buy, and make sure that the risks you want to cover are, in fact, covered.
Cost. A travel insurance policy can add anywhere from 4 to 8 percent to the cost of your trip, depending on your age and how much coverage you want. Websites such as www.insuremytrip.com can help you compare policies and prices. For McDowell, cancellation coverage for her $3,600 Alaskan cruise cost her an extra $280. “It was worth it,” she says. “Without the insurance, getting sick would have meant deciding between staying home and losing the money or going and being miserable.”
Is it worth it? Travel insurance often makes sense on very expensive trips or on trips that require large, non-refundable deposits or advance payments for hotel stays or special-event tickets. Cruises can fall into this category because most of the cost is paid upfront and canceling even 30 days in advance could mean no refund.
But there are also instances where insurance does not make sense—for example, if your trip doesn’t include high prepaid expenses or if your prepaids, such as airline tickets are changeable for a small fee. If you rarely get sick, cancellation coverage may not be worth the added expense. Most trips go off smoothly or with minor hassles that tend to affect your mood more than your pocketbook.
Credit card coverage. Some credit card companies provide certain travel assistance when you pay for your trip expenses using their card. While helpful, these extras are typically not as comprehensive as travel insurance.
For example, Mike Cimino of Southern Pines, N.C., was traveling in the Canary Islands when he fell and broke his kneecap. His credit card company connected him with medical personnel in the area, facilitated consultation with his doctors back in the United States, and arranged for him to be flown home on a stretcher after his surgery. While this logistical help was welcome, the medical bills were his to pay.
If your credit card company already provides certain coverage, you may be able to save some money by buying a policy to fill in the gaps.
Sources. If you book your trip through a travel agent or cruise line, you likely will have the option to add travel insurance at the time you purchase. In some cases, insurance may be included in your package. For example, Elderhostel includes certain kinds of coverage, including emergency medical evacuations, in each trip at no additional cost. You can also buy policies from a number of companies such as Access America or Travel Guard.
Medical Care. Medicare will not cover health care expenses outside the United States. Likewise, some private health plans limit coverage for those traveling outside the plan’s network. Travel insurance can bridge this gap but you should check with your plan provider to make sure you’re not paying twice for the same thing. Also, some travel policies may exclude pre-existing medical conditions unless you obtain a waiver or purchase the policy far in advance. If you have recently had a heart attack or have diabetes, for example, check with the provider to make sure you’re covered.
Medical evacuation. Travel insurance can pay for evacuation to your home or to the nearest suitable medical facility, important if you become injured in out-of-the-way places. Such evacuations can run into the tens of thousands of dollars, according to Clif Carothers, president of U.S. Air Ambulance.
“We once evacuated a couple whose vehicle had overturned while they were traveling in Africa,“ he says. “We arranged to have a bush pilot fly them from where the accident occurred to an airstrip where our jet could land. They were in pretty bad shape, so we then flew them to Frankfurt, Germany, for care and, eventually, back to their home. The total cost of the evacuation was about $115,000. To make matters worse, they had no travel insurance, so it was all out of pocket.
The odds. According to a recent survey, 17 percent of people who buy travel insurance actually wind up filing a claim. That’s fairly high compared with other types of insurance, considering that one of the fundamental tenets of insurance is that most people won’t use it—if they did, policies would be unaffordable. For some, however, travel insurance can turn out to be a wise investment.
Al and Jodie Goldberg were traveling to Australia from Washington, D.C., via Charlotte and Los Angeles. Because it was a trip with many connecting flights, they opted to pay $269 for insurance. Their policy covered trip cancellation up to $9,000 (the amount of their prepaids), medical expenses up to $10,000 per person and medical transportation up to $20,000 per person; it also had an assortment of coverages for delays or lost baggage.
The trip got off to a shaky start. The couple became stranded in Charlotte when their flight to Los Angeles was canceled due to heavy smoke from California forest fires. Their travel insurance paid for a hotel in Charlotte, meals during their delay and cab fare to and from the airport. It also reimbursed them for a prepaid hotel room in Sydney they were unable to use because of their late arrival. They eventually got another flight, but one of their bags didn’t make it, and the insurance paid to replace Jodie’s formal dress for their night out at the opera.
“I think Murphy’s Law was written with international travel in mind.” Says Al. “The travel insurance helped us to smooth out the rough spots and still have a great trip.”
In his wildly popular book The 4-Hour Workweek, Timothy Ferris told the story of Vilfredo Pareto, an economist who lived from 1848 to 1923. Unless you’ve read that book, you’ve probably never heard of Pareto, but you’re probably familiar with his most famous economic theory, the “80/20 Principle.” Also known as “Pareto’s Law,” it basically says that 80 percent of the outputs result from 20 percent of the inputs. It can be applied almost anywhere. 80 percent of the people produce 20 percent of the wealth. 80 percent of the profits come from 20 percent of the customers. Basically, 80 percent of the results flow from 20 percent of the effort.
How can we apply this to retirement? After working a 9 to 5 job for the better part of forty years, there is a real temptation to measure your daily progress by hours spent as opposed to tasks completed. If you don’t have a “full day” there is a latent guilt that is carried over from your days of trading time for money (I give my boss forty hours and he gives me a paycheck.). To avoid that feeling many retirees fill their days with busywork.
If you’re going to have a meaningful retirement, you need to embrace the idea that your goal is not to have a busy day or a full day, but a day spent on things that produce results (e.g. meaning, fulfillment, purpose, fun, happiness). In other words, don’t focus on time. Focus on tasks. Ask yourself, what part of your day is done simply to busy yourself and what part is actually going to get you closer to your goals and give you a sense of accomplishment and purpose. If Pareto’s law holds true, you should be able to cut about 80 percent of the busywork from your retirement schedule and focus on the 20 percent of tasks that are actually worthwhile. The payoff comes not only in the form of a more relaxing retirement, but a more meaningful one as well.
No matter what exciting plans you have for retirement, you will still have a good many maintenance type activities that pop up on your calendar every day or every week; things like sleeping, eating, paying bills, going to the doctor, getting groceries, mowing the yard, and cleaning the house. While important, these things don’t really add much significance to your life.
To find meaning and significance, you will want to focus on milestones. Those are the things that, when done, give you a sense of purpose and accomplishment. Milestones tend to fall in areas like family, relationships, education, adventure, community, hobbies, travel, and health. When reflecting on your life, the milestones will be the things that stick out. They will be the things that you are most proud of. The maintenance will just fade into the background. Because of that, do everything you can to condense, consolidate, minimize, or outsource the maintenance so you can be free to spend more of each day focusing on milestones.
As you move toward retirement, consider the merits of building a life that is light on fixed assets and heavy on experiences. When younger, most people want a bigger house to fit the kids and keep up with the Joneses. They want to live in a great neighborhood with great schools. The same logic is used when purchasing cars. Bigger and more expensive is better, safer, etc.
Unless you have enough money to fund both, retirement should be focused on the experience, not the asset. The wisdom of age should have taught you that life isn’t all about who has the most square footage or the biggest car collection. Contrary to popular belief, he who dies with the most toys does not, indeed, win. In all likelihood, he who dies with the most toys is a bit of a jackass. A life spent in dogged pursuit of rich experiences and meaningful relationships can be infinitely more rewarding than one spent focused on the acquisition of more stuff.
At the risk of sounding obvious, you have a much greater chance of accomplishing a goal if you know exactly what it is you want to do. Someone committed to going to Harvard has a much greater chance of ending up there than does someone who just wants to go to college. Someone committed to climbing Mount Everest is much more likely to reach the summit than someone who just wants to climb mountains.
How about you? When it comes to retirement, how specific are your plans? do you want to “save” or do you have a specific dollar amount in mind? Do you want to “retire as soon as possible” or do you have a specific date in mind. Do you want to “travel” or do you have a goal to visit five countries a year? A decided person is a productive person. Being specific allows you to aim at a target. Not surprisingly, aiming at the target improves your chances of hitting it.
For many, the phrase “retirement planning” has become limited to the planning done in the years leading up to retirement. When you consider that your retirement could last for 20 to 30 years, however, it’s easy to see that your planning won’t end once you transition out of the workforce.
Chances are good that the things you want to do, are able to do, and can afford to do will change over the years. As a result you will likely have several transitions to plan for.
As a chess fan, I was struck by how similar the phases of retirement are to the three phases of a chess game. In chess, you have the opening, the middle game, and the end game. Let’s take a quick look at each and see what parallels we can draw with retirement.
Phase 1: The Opening
The opening of a chess game is all about maneuvering your pieces into position in anticipation of your overarching strategy. How well you develop your pieces in the opening often determines whether you spend the game on the attack or on your heels.
Similarly, Phase 1 of retirement is all about outlining your strategy and getting your pieces into play. That means deciding what you want to do and determining how much it will cost. For example, do you want to travel or stay close to home? Do you plan on moving? Is there a particular hobby or activity you want to focus on? Spend time thinking and talking to your spouse about what your typical day in retirement will look like.
Once you have your plan it’s time to create your retirement budget. List out your sources of income, such as Social Security, pension, personal savings or income from your job if you plan on working part time. Next begin putting numbers to the planning you did earlier. How much will things like your housing, food, travel, insurance, hobbies, and entertainment cost?
Is your estimated retirement income enough to cover your expenses? If not, now is the time to make up for any shortfall. You’re likely in your peak earning years and retirement plans like IRAs allow people over 50 to make excess “catch-up” contributions. Save as much as possible and work to eliminate debt so you can enter retirement with your finances in order.
As you can see Phase 1 has many moving parts. It is not unusual for someone to spend several years planning for and executing this transition. Once you have the where, when, and what questions answered and are confident that your nest egg is up to the task, you are ready to move from the opening to the middle game.
Phase 2: The Middle Game
In chess, the middle game is where most of the action is. The pieces are in play and each player can get creative. In fact, a good imagination and the ability to execute are two of the most important elements of the middle game.
If Phase 1 of retirement was heavy on strategy, Phase 2 is heavy on tactics. It’s time to transition out of your job and turn on your income streams by claiming Social Security and starting withdrawals from your personal accounts. It’s usually best to take money from your taxable accounts first (save tax-deferred accounts until later) and to keep your withdrawals to around 4 percent of your account value per year.
Once your income is set you can begin doing all the things you planned for this phase. This can sometimes be complicated by the fact that your circumstances will constantly be changing. Your health may change. Your finances may change. A great opportunity might present itself that you hadn’t considered before. All of these things will require you to modify your tactics.
World chess champion Gary Kasparov once described chess as trying to find your way to a destination using a map that is constantly changing. The same is true in retirement. Your strategy will likely remain the same, but the maneuvers you make to support your strategy will be fluid. The challenge is to wake up each day engaged and ready to act. As is usually the case with chess, you have limited time to make your moves.
Phase 3: The End Game
When the end game arrives during a chess game, you likely will be down to a few pieces. Earlier in the game, you either sacrificed them as part of your strategy or had them taken from you unwillingly. Depending on how things played out in the middle game, a change in strategy or tactics may be in order. The available choices and the time you have to make them are limited.
Obviously, the parallels in this phase are a little more unpleasant to consider, but since there is no Phase 4, there are some key issues you will want to take care of. For example, you will want to review your will and powers of attorney to make sure they are up to date and reflect your current wishes. Likewise with beneficiary designations on things like your life insurance policies and retirement accounts.
Also, as your health changes, the desire to live next to the beach may give way to the desire to live closer to family or a good medical facility. Moving is always a major undertaking, so talk with family and do as much planning as possible while you’re healthy.
As you can see, retirement is more than just a date on the calendar. By planning for each major phase, you can have peace of mind and focus on living a rich, rewarding life no matter how many pieces you have left on the board.
Portions of this article were excerpted from the book The Bell Lap. In addition, Joe originally published this article at www.fpanet.org.