Most people living in Canada don’t know about salary deferral plans, and how they can be used to save tens of thousands of dollars for travel. However, if you’re a Canadian with a stable job and the desire to travel for six to twelve months, then a deferred salary plan might just be your ticket to walking straight out of work and onto an airplane. I should know, since I did it.
Several years ago, I enrolled in my Canadian employer’s salary deferral plan. At the end of four years, I had saved almost $80,000. I used that money to take eight months off work and travel around the world, starting in Taiwan and ending in Colombia. In fact, it was that experience that really inspired me to get into travel blogging.
Now, seven years after I returned home from my first “paid” sabbatical, I’ve just received approval to do the same thing again! In just three years’ time I will be taking another eight months off work to travel around the world to all the destinations I missed on my last trip!
So how do I save more money for travel than most people earn in a year? Let me explain how Canada’s deferred salary plans work, and how you can use them to save money for travel.
What is a salary deferral plan?
A salary deferral plan is the easiest way to save money for travel.
Basically, you enter into a contract with your employer to set aside (“defer”) a certain percentage of your salary every month. Later, you can take time off work and get paid out of the money that you’d set aside.
Because I live in Canada, I can only speak to the legalities and processes of deferring your salary in Canada. However, I know that similar programs are available in many different countries.
What are the benefits of a deferred salary plan?
There are two main benefits of a deferred salary plan:
For me, the biggest benefit of being on a deferred salary plan is the fact that it is forced savings. I never saw the money that I was deferring and I had no way of accessing that money until I began my leave of absence, so I was never tempted to waste it at Sephora or Starbucks.
Second, the money that you defer is taken from your pre-tax income, which can reduce your annual income tax liability. You do have to pay tax on the money that you set aside, but not until you begin to withdraw it.
What are the considerations with a salary deferral plan?
Salary deferral plans can be quite flexible, so it’s up to you to decide how to structure yours to make it work best for you. Here are some things you’ll have to consider:
How much salary will you defer?
My employer allows me to defer anywhere between 5% and 33% of my monthly salary. The first time I deferred my salary, I settled on 20% over four years, which reduced my salary to roughly where it had been five years earlier.
For my second sabbatical, I was able to reduce my deferred amount to 15% over three years, as I now had some additional income coming in from my blog.
When will you take your time off work?
Initially, I had planned to defer 20% of my salary for three years. This would defer the equivalent of 7.2 months of (pre-deferral) pay, which I planned to stretch over eight months of travel.
However, midway through my salary deferral period I received a promotion at work, and became involved in a new, three-year project. I asked my boss if I could delay my time off by a year so that I could see the project through to completion. He agreed, so I ended up deferring 20% of my salary for four years, leaving me with the equivalent of 9.6 months of pay to stretch over eight months of travel.
For my upcoming deferred salary leave, I will be deferring 15% of my salary over three years and four months. That comes up to six months of pay, which I will supplement with personal savings and income from my blog.
My workplace only offers salary deferral leave plans for leaves that are exactly six or twelve months, and there are restrictions on how often you can take a leave (at my workplace, it is one six-month leave every three years or one full-year leave every five years). Other employers may be more flexible.
How will you withdraw the money from your deferred salary account?
My employer offers three different withdrawal options – withdrawing all of the money at once, withdrawing it in two equal payments, or dividing it into equal monthly payments.
The first two options would have put me at a tax disadvantage (as they would dramatically increase my annual income in the year they came out) so I chose to withdraw monthly. This way, I received the taxable earnings split relatively equally across two fiscal years.
What are the disadvantages of a salary deferral plan?
The biggest disadvantage of deferring your salary is that it reduces your income during the deferral period. Taking a 15% or 20% pay cut affects your lifestyle and forces you to really face your financial priorities.
I love traveling, so I continued to save money for travel during winter, spring and summer breaks, despite my lower income. In fact, I traveled to Nicaragua, Honduras, Georgia, Armenia and Germany during the time that my salary was reduced. To make that happen, I had to cut back spending in other areas, including dining out and new clothes.
The other big disadvantage of a deferred salary leave plan is that it could have a negative impact on your career. My employer guarantees that upon my return, I can have a job with the same responsibilities at the same salary level. However, they don’t guarantee that it will be in the same department or even the same building.
My boss promised he would do everything possible to get me back into the job that I had (and loved), but things didn’t quite work out that way. My first leave ended at the end of February 2020, and as you know there were some big changes in March of that year. After my leave I came back to work for nine days before we closed and switched to remote work, and that shift, combined with my return from leave, forced me into a position that I didn’t love. It took three years to get back into my original job.
Did you actually spend more than $10,000 a month traveling?
Not exactly.
Remember, my salary was deferred before I paid tax. So, each payment that I received during my leave of absence had income tax and other contributions taken out. My rough estimate is that I kept about 65% of the money each month (about $6500).
As a homeowner I had to keep up with costs associated with maintaining my home, including mortgage payments, HOA fees and insurance. These average about $2000 per month (I know, right?!), leaving me with only $4500 CAD in my monthly travel budget.
To offset some of the costs back home I tried to rent out my second bedroom for the time that I was away, but the tenant I found backed out at the last minute. If I was doing this again, I would start searching for a tenant at least six months in advance.
Is this how you should save money for travel?
Every traveler and every situation is different, and a salary deferral plan isn’t right for everyone.
In particular, it may not be the best system for an avid investor, who might benefit from investing part of their normal monthly pay in an investment account that has the potential to earn a lot of interest. If you’re a market whiz, you may be able to beat the tax benefits of salary deferral and earn an additional profit just by playing your cards right on the stock exchange.
Of course, salary deferral also isn’t an option for independent contractors or people whose employers don’t support this model. If it sounds appealing to you, but your boss isn’t on board, you might have to look for a new job.
However, I stand by my belief that for many people, a salary deferral plan is the best way to save money for travel. Again, it becomes forced travel savings with tax benefits during your earning and withdrawing years, and it often offers flexibility in terms of payment terms and periods.
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