Before retirement, you probably had the chance to increase your income, such as by earning promotions or changing jobs. But during retirement, it’s more common to live on a fixed monthly income determined by your savings. This can force a different approach to your personal finances and perhaps even to your lifestyle. Follow the tips below to help you get adjusted to living on a fixed income in retirement:
Create a budget
Creating a budget is not terribly exciting, but it’s an important part of keeping your finances in order and having a good life in retirement. The upside is that a fixed income makes budgeting easier — the more constants you have, the more straightforward the whole endeavor. Once you’ve tracked your expenses, the next step is to isolate the ones you can’t avoid, and separate those into fixed and variable categories. “Fixed expenses are those mandatory expenses that you pay the same amount for each time,” explains Jeremy Vohwinkle, retirement planning specialist. “Variable expenses are the type that will change from month to month.”
For fixed expenses, it’s easy to know how much you’ll need to set aside because the amount you pay never changes. For variable expenses, tracking your spending habits over a few months can really pay off. By reviewing those expenses, you can come up with accurate estimates of how much you’ll be spending in the future.
Vohwinkle recommends setting up a “50-30-20” budgeting philosophy, where you allocate 50 percent of your budget to essential expenses, 30 percent to things you want, and 20 percent to savings and repaying debt. Even in retirement, it’s still a good idea to put money aside for unexpected bills. In fact, you may want to allocate more of your budget to savings depending on your anticipated medical needs.
Reevaluate your lifestyle
When you work on your budget, you may notice your current expenses are higher than your fixed income or that you don’t have a lot of room to buy things you want or to set money aside. If you’re only just getting by, it will be hard to truly enjoy your hard-earned retirement. There are two major ways to solve this problem: get a side job to increase your income or find a way to reduce your expenses. For example, if you are an empty-nester and the house you are currently living in is bigger than you need, you can save a lot of money by downsizing.
One thing to keep in mind is that after you enter retirement, your needs and lifestyle will likely change regardless of budgetary limitations. “As, by definition, retirees are no longer at work for eight or more hours a day, they have more time to travel, go sightseeing, shop, and engage in other expensive activities,” writes retirement planning expert Julia Kagan. “Accurate retirement spending goals help in the planning process.”
Track your expenses
One of the first things you should do when you begin to live on a fixed income is to track all of your expenses. “Pinpoint your money habits by taking inventory of all of your accounts, including your checking account and all credit cards you have,” advises consumer savings expert Courtney Jespersen. When you are close to entering the retirement phase of your life, begin tracking all of the things you spend money on for a few months. Make sure to record even the most minor expenses. Buying a pastry at your local coffee shop once a week might seem insignificant, but it can add up over time, especially when combined with other, similarly minor expenses. To make things easier, separate your expenses into categories like utilities, healthcare, and leisure. This will be handy when creating a budget.
Over time, whether retired or not, your expenses and priorities will change. You should therefore routinely revisit your budget and reevaluate your lifestyle if necessary. Work with a certified retirement financial advisor at your local financial institution to ensure your retirement is the best it can be.