Financing the Long Term Cruise
Luperon, Dominican Republic
Sailors who would like to cruise the seven seas for years at a time often ask themselves “How can I possibly afford to chuck it all and be a cruiser”? Other sailors crave a one or two year sabbatical while some just long for a season-long cruise. Let’s take a look at how some cruisers actually manage to get away from the working life and go cruising, and how others blend cruising and working into a happy compromise.
First, let’s categorize some different varieties of cruising and then take a look at various ways of financing those lifestyles. Then we will look at some guidelines to determine the costs of cruising. Finally we will pull it all together and determine what the prospective cruiser needs to finance his or her long-term cruising plan.
The most basic form is living aboard a boat that is stationary in a marina most of the time. Perhaps Live Aboards are technically not cruising, but many cruiser wannabes start this way, working until they have accumulated adequate funds to cast off the dock lines. They also outfit or refit their boats while living aboard in the marina. Many liveaboards never become cruisers but are happy to be near the water enjoying the ambiance during their hours away from work.
Coastal Cruisers may stick to the Intra-Coastal Waterway (ICW) and move north and south with the seasons. On the East Coast, their cruising grounds range from the Florida Keys to Maine. Some jump offshore for a passage when the weather is good, while others remain within the protection of the barrier islands. More popular with power cruisers than sailors is the Great Circle Route, which adds inland rivers and lakes to the ICW and provides a different route on the return leg.
The majority of sailboat cruisers are Island Hoppers. They are more adventurous than coastal cruisers. In addition to the ICW and coastal ports, they enjoy offshore sailing enough to cruise to the Bahamas and the Caribbean, or to Baja Mexico from the West Coast of the USA. Offshore passages are usually no more than a few days long and stand a good chance of avoiding bad weather.
Finally, Ocean Voyagers will cross the Atlantic or Pacific and sail just about anywhere. Since they are at sea for weeks at a time, they must handle whatever is thrown at them. Some ocean voyagers give up practically all ties with their former homes and simplify their affairs to a degree most of us would find impossible. Only a small percentage of cruisers would claim to be Ocean Voyagers. Do not underestimate what it takes to be an Ocean Voyager – it is not for the faint of heart.
It is important to identify where you fall in this spectrum when planning your cruising finances. You do not need to buy an ocean voyaging boat or the associated equipment to island hop or head down the ICW.
There are as many financial styles as there are cruising styles. Most cruisers fit in one of the following categories:
1. Retired at normal retirement age and living from pensions, social security and savings. Typical age – 60 or older.
Retired early through excellent investing and planning, sale of a business, or a convenient downsizing. Living on savings and investments, possibly with pensions in the future. Typical age – 50 or older.
Taking a sabbatical from working, living on savings for a period of a year or two, with plans to resume a career afterwards. Sometimes the career can continue while cruising using the miracles of modern communication (web site developers, absentee owners of businesses, etc.). May have ambitions to settle and work in the islands. Typical age – 30s or 40s.
Combining cruising with working, alternating periods of each. Probably accepting jobs that are less lucrative than could be had “back home”. Often operating on an extremely low budget on a small, no-frills vessel. Typical age – 30s through 50s.
Wealthy folks who have benefited from an inheritance (look for boat names like Aunt Sadie), a successful high profile career (rock stars, basketball players, etc.), or other good fortune. Typical age – 40s or older.
While these groups may not include every cruiser, the vast majority can be plugged in somewhere on this list.
Another variable to consider relative to cruising style is full-time versus part-time. Some cruisers maintain a home of some sort and spend part of each year away from the boat. This adds a financial wrinkle that is beyond the scope of this article.
The Cost of Cruising
Much has been written about the cost of cruising. It is important to understand your style so that you can develop a budget and plan the supporting finances. Once again, there is a broad spectrum of styles and associated costs. Generally speaking, it costs less to live aboard your boat and visit interesting places than it costs to live on land. This statement may seem to be unreasonable considering the high price of boats and marine supplies, however the cruiser usually lives happily without many of the trappings of life on land. The key to a moderate cost of cruising is cost avoidance. By giving up expensive clothing, high priced restaurants, real estate, telephones, cable TV, furniture and household goods, vehicles, and the associated upkeep, taxes and insurance, many of the land costs simply go away. It can truly be demonstrated that “a penny saved is a penny earned”.
If you are retired or are working on a limited basis, your tax bill will be lower than it was when you were a highly paid professional and you will be free to take up residence in a low tax state. Many cruisers pay no more than 15% federal income tax on their last dollar earned. Coastal states Florida and Texas are both income tax free and Florida’s intangible tax is moderate.
Replacing the land costs are the expenses of purchasing the boat, the operating cost of the boat including registration, maintenance, insurance and fuel, marina fees, possibly customs and immigration fees, along with personal expenses such as food and drink and medical care.
How much does all this add up to? On the very low end of the range, we met a young man anchored in a harbor in the Dominican Republic who was planning to live there for $250 per month! He owned the boat and $250 was enough to buy his food and fuel – and he really did not want anything else. Other low budget couples might claim to be able to live on less than $1,000 per month. On the upper end of the scale (not including the Wealthy Folks category), the cost for a couple is around $3,000 per month.
Let’s put the purchase of the boat aside for the moment and consider operating costs, groceries and some fees. A monthly budget for an Island Hopper in the Bahamas might look like this:
Boat insurance $200
Boat Maintenance $100
Immigration fees $50
Land transportation $100
Mail forwarding $100
Marina fees $300
Medical Clinic Visit $100
Total $2,170 or $26,040 annually after taxes.
Note that this budget does not include items such as medical insurance premiums, or “back home” items such as furniture or automobile storage. Large variations can exist in this budget for items such as marina fees, which can add up very quickly, and restaurants, which will take all the money you care to give them. Grocery purchases will vary depending upon the consumption of provisions brought from home base. Few countries can compete with the USA when it comes to the price of groceries (and most other items). It makes sense to take along as much as possible from a cost perspective. On the other hand, groceries are generally available anywhere and you do not really need to take everything with you. (Note that this is not true for boat spares. Take them!)
In developing you own budget, you must define your cruising style as described above and consider that this sample budget is based on a cruiser who anchors out most of the time and uses his dinghy for access to land. Many powerboat cruisers and a few sailors never anchor, spending every night in a marina. It is easy to spend $100 per night in marina fees on the East Coast of the US, which changes that line item from $300 to $3,000 per month. Conversely, some cruisers never enter a marina, anchoring out even if the holding is bad and the weather is deteriorating. You have to choose your style!
How Much Do You Need?
Based on the above budget plus some costs for medical insurance and taxes, lets assume that you need $40,000 before taxes per year to cruise (or a net of about $3,000 per month), as well as a boat that is seaworthy and well equipped.
Most cruisers want to own their boat outright before they begin their new lifestyle. This precludes most folks from purchasing a new $500,000 SuperFloater 41. Since many new cruising boats are now priced far higher than the house you are selling, it may be time to look at a smaller boat, one from a production builder, and more than likely, one that is gently used. Go back to the Cruising Style section above and decide what you really need for your cruise and do not be tempted to buy more boat than you need or can afford. One caveat though: Completely refurbishing or rebuilding a boat can be more expensive, not to mention time consuming, than buying a good boat to start with. The unskilled amateur does not have the skills or resources that a competitive boat builder has. It is hard for him to compete with a properly equipped yard. Would-be cruisers who think they are saving money by building their own boats or totally refurbishing them are often just giving their labor away free. They may well be dollars ahead to earn income in their own field of expertise and pay a skilled boat builder to refurbish the boat. We have met folks on sabbaticals who have spent their entire allotment of time and money repairing an older boat, leaving nothing for the cruise.
Cruisers who are actually out there sail a wide range of boats with good success. There is a bell curve of size and cost which at the low end might be something like an old Pearson 28 and the high end a recent Amel 53. In both cases, the view is the same with the hook down in a beautiful anchorage. Looking at the center of the bell curve, you will find a lot of boats worth between $50,000 and $150,000 that are 5 – 15 years old and in good shape. Most are 40 feet long, plus or minus 5 ft. Don’t think you need the latest and greatest in boats or equipment.
Living and Operating Costs
Now you have chosen your boat, how can you sustain the cruising lifestyle? Once you have chosen a number such as $40,000 per year as your cruising budget, you can determine whether you can afford to retire and go or whether you will need to continue working and add to your savings.
If you are retired and receiving a pension or annuity, it is easy to determine if it funds the budget. If you are planning to live off your nest egg for the rest of your life, it becomes a challenge to calculate whether you can make it. The sages in the investment industry have recently proclaimed that you should be able to spend 4% of your current assets each year without running out of money before you die. So, in order to generate $40,000 of income each year from your investments, you must start with $1 million. As the nest egg increases (or decreases) in value from year to year, 4% of it represents more (hopefully) or less than the original $40,000. Using this example as a rule of thumb, you can determine whether you need to save more money or reduce your cruising budget, or alternatively, that you are set and it’s time to get outta here.
Tapping the nest egg can be a challenge if the savings are mostly in the form of IRAs from former employers. If you are not yet 59 ½ years old, removing funds from an IRA can potentially trigger a hefty 10% tax penalty. Fortunately for early retirees, there is a way around the tax penalty if you are willing to commit to withdrawing equal amounts each year from your IRA for five years and until you are 59 ½. These withdrawals are known as Substantially Equal Periodic Payments and are based on Section 72(t) of the tax code. This method can be very useful in a cruising situation. Check with your financial institution or CPA for details and be persistent because many tax preparers have no knowledge of the requirements.
Potential cruisers planning a sabbatical can estimate the cost of their cruise from the above information and save accordingly, hopefully maintaining a reserve to use while they are re-entering the workforce. Cruisers who plan to work along the way can also estimate their costs accurately and plan their work periods. Remember that most foreign countries reserve jobs for their own citizens first and will not issue a work permit to a foreigner unless he has skills that are needed in that country. Some foreign countries (e.g. The Turks and Caicos) charge a fat fee for a work permit, even if they need you desperately. This may mean returning to the USA regularly to go to work.
Some Real Cruiser Stories
There are many cruisers out there who fit the retiree profiles mentioned above. Some have followed the traditional approaches and others have different slants. Several cruisers we met are fortunate enough to own a house outright. They are able to lease their house and cruise on the rental income. Another friend is a construction expert whose skills are needed in a foreign country where he is able to earn a substantial salary for a few months at a time. Others have the benefit of portable skills (nurse, computer programmer, etc.) which enable them to start and stop work easily when they need to. We have also seen cruisers providing skills and services to fellow cruisers. Although they do find a little work that way, it is not very lucrative and may be illegal in some foreign countries.
Accumulating the Nest Egg
A final few words on accumulating the nest egg. Some of you may be looking at the foregoing section and saying there is no way you will ever have $1 million (or whatever you need) in the bank and you will never be able to go cruising. Or alternatively, it will take so long to accumulate the funds, you will be too old to go. Using a few cruising principles may help you get there or get there faster. There are many, many texts on investing that will advise you where to put your savings so they will grow with the stock and bond markets. The lesson to be gleaned from the cruising life style is “cost avoidance”. We stated earlier that cruising can cost less than land life because many of the costs of land life simply go away. If you buy into that, you can make some of those unnecessary land costs go away long before you go cruising.
Live Within Your Means
My first principle of personal finance is “spend less than you earn”. This seems so simple, yet it is overlooked by the majority of Americans. Borrowing money to buy something (not including a major investment such as a house or business) is throwing money away. Interest is simply money down the drain for someone who wants to accumulate a nest egg. It is a myth that interest is O.K because it saves taxes. Besides eliminating interest on consumer debt, try eliminating some of the other trinkets and trappings that cruisers do not need. As potential cruisers approach retirement or a sabbatical, one of their biggest problems is unloading the oversized house and possessions they have accumulated. Most consumer items are sold for 20 cents on the dollar when that time comes. We “downsized” our possessions to go cruising and as we got things ready to sell, we kept asking ourselves “What were we thinking when we bought that?”
Many, many items we spend our money on are totally unnecessary and are purchased only because they are advertised and marketed so heavily. Examples that come to mind are houses that are way too big for the number of occupants, households that have more cars than people to drive them, cell phones that transmit photographs, and clothing with the “in” logo on it. Instead, invest the money that you might have spent on those excesses, and the prospect of early retirement and the cruising lifestyle will be greatly enhanced.
As an example, let’s assume that you are well paid and have a household income approaching $100,000 per year. You would like to sell up and go cruising in 10 years but you are having trouble saving the money. The difference between a mortgage payment of $1,200 per month and one of $1,800 per month may not seem too significant relative to your take-home salary. Therefore, you buy a house that costs $100,000 more than the one you really need. If, on the other hand, you bought the less expensive house and invested the difference of $600 per month and averaged a 10% return, at the end of 10 years you would have a kitty of over $300,000 which could be used to buy your ultimate cruising boat. Likewise, the monthly lease payments for a Lexus are $300 more than the “sistership” Toyota on which it is based. Drive the cheaper vehicle, put the $300 per month in a good investment, and a few years later you will have a cruising kitty or a boat fund.
Your Prized Possessions
So you have made it, you are ready to go cruising, so now you have to decide what to do with Aunt Mabel’s antique bureau and your other prized possessions. Most cruisers who have been out for several years will advise you to dispose of all but the most valued stuff before you leave. If you are going for a short sabbatical then it makes sense to store your furniture ready for your return. If you decide to store your things, note that a moving company’s warehouse is an economical choice. We were quoted $2.50 per 100 lbs per month in a small southern town. A 2 bedroom apartment is estimated to contain 4,000 lbs. A large house would be proportionally more. Note that moving firms charge by the pound while mini-storage units charge by the square footage of the unit. Moving your things from your abode to the warehouse, in and out of a unit, and then into another moving van upon your return spells damage and loss.
So, whether you want to be a Live Aboard or an Ocean Voyager, whether you will be Early Retiring or just enjoying a Sabbatical, good financial planning can make the cruising lifestyle a reality for you.