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Loss of Income: Filling the Gap
Loss of Income: Filling the Gap
Depending on how long you have been working within the Wisconsin Retirement System, your income in retirement could drop by as much as 50% when you begin drawing your pension. For that reason it is critical that you begin to prepare for the inevitable and significant loss of income, so that you can maintain a life that feels comfortable for you. So how will you fill that gap?
Twice a month, I am going to offer some advice for how you can be ready for a loss of income and not feel like you are constantly pinching pennies to pay the bills. When approaching retirement, it is essential to prepare for living on what your future income will be. In this blog, I will share some ideas to get you ready for a dip in your income that won't effect your quality of life.
Emergency Savings for Retirement
Perhaps you have always had sufficient emergency savings, but many people rely on living paycheck to paycheck and lack savings for big medical bills or home and auto repairs. While you are working, you can always rely on future paychecks, but as a retiree your monthly pension is only going to stretch so far. It is critical that you are ready for a major financial surprise, and not have it significantly impact your lifestyle. This is especially true if you retire before age 59.5 and cannot access any of your IRA accounts without penalty.
For myself, it was actually our last year of working that we had some home repairs that were very unwelcome. Two months before retirement we found out we needed a foundation repair that was going to cost us over $6,000! Luckily, we had money set aside for another home project (flooring) and we were able to pay the bill with cash. If this situation had happened two years into retirement, it would have been alarming to pay so much out of our savings.
If you are wondering how much emergency savings is enough? This very much depends on what you need this savings for. Generally it is recommended that you could live off your emergency savings for at least 3 months. How much you need specifically varies based upon if you're single, married, have a house payment, etc.
The next question you might have is; how in the world am I going to save that much in my last 1-2 years? Especially if you only have say, $1,000-$2,000 in liquid savings right now. Here are some ideas:
During your last year of teaching, take what you typically save for summer and put it in your emergency fund. Your pension starts on July 1, so you won't need as much available for the summer.
Take a part-time job and save every nickel for your emergency fund. You will be surprised how much you can save in a year.
You may want to consider discontinuing your IRA contributions so that you can have access to some funds to supplement your monthly pension prior to the age of 59.5.
Re-evaluate your spending. Your last year or two can be a great time to start getting ready for lower income in retirement. As you make spending cuts, save those funds to your emergency savings.
Set up an auto transfer on each payday from your checking to your savings account. If the money is not in your checking account, it will be easier to not spend it.
Your Last Year of Working
Thinking about your last year of teaching can evoke a lot of emotions. Some of my emotions included relief, excitement, and anxiety. Anxiety tended to be the emotion that dominated my thinking. I wondered about how I could be sure we could live on my pension, along with some part-time income? What finally helped me relax was getting a firm idea of what we were spending on a monthly basis. People with adequate income, often get in the habit of raising their spending levels to whatever income they have available and sometimes more. It is natural to ignore the details of your spending when you are busy with your career, family and fun. My number one suggestion for people in their last year of working is to start tracking what you are spending. This can be as simple as getting a notebook and writing down every expenditure (including your credit cards) for a month or even two. Once you have done this, the next step is to categorize your spending to get a firm grip on your habits. Then you can target spending that you might want to modify to get yourself ready for your first year of retirement. For example, perhaps you have a car loan that has 2 years left, but is relatively modest and you can afford to pay more on. Or you may notice that you are spending a lot on ordering food in. Maybe when you tract your spending, you are fairly frugal, and just need some more income. It might not be a bad idea to explore a side gig for income that you can save for your future?
Once you have written down and categorized your spending, the motivation to do things differently is simple: YOU WON'T BE WORKING IN A YEAR! For myself, it was very motivational to think that I would have my freedom soon, and I became very willing to do what was necessary to financially prepare. I was amazed at what my wife and I accomplished financially in the course of about 15 months: we paid off a $20,000 home equity loan, saved about the same amount in liquid assets and paid cash for other improvements to our house. We would not have been able to accomplish all of this without first knowing what we were spending.
The Benefits of the Empty Nest:
Empty nest syndrome is often associated with feelings of loss and loneliness as children leave home to pursue their own lives. However, it's essential to recognize the silver lining in this transition. Becoming an empty nester can have a significant positive impact on your finances. With the kids out of the house, you now have an opportunity to cut expenses and potentially increase your savings. With your children's financial dependence lessening, it's an ideal time to prioritize your retirement savings. Let's explore some ways in which being an empty nester can help you save money.
One immediate benefit of being an empty nester is the substantial decrease in utility bills. With fewer people in the house, you'll use less electricity, water, and gas. Lower water consumption and reduced laundry loads translate into reduced bills.
With fewer mouths to feed, your grocery bill will naturally decrease. You can adjust your shopping list to reflect your new household size, saving money on food and reducing waste. You can also save money by cooking more meals at home. Eating out less frequently and preparing meals not only saves money but also allows you to make healthier choices.
With fewer people in your household, you may be able to adjust your insurance policies to reflect the reduced risk. Review your auto, home, and health insurance coverage and consider adjusting your plans to save on premiums.
You don't get a second chance to save for retirement. Many parents continue to feel the need to keep their adult children on their cell phone plans, tv subscriptions and more. When the kids leave the home, this is a perfect time to begin the process of separating your finances from theirs. This can be emotionally difficult, but it is important for you to prioritize your saving, and it is beneficial in many ways for their new found independence.
Take a close look at your cable TV package and subscription services. Evaluate your subscriptions and cancel those you no longer use or need. This includes magazine subscriptions, streaming platforms, gym memberships, and more. Assess your current cell phone plans and see if there are more cost-effective options available. Many providers offer plans designed specifically for individuals or couples. Consider switching to a different plan that better suits your needs and helps you save money on monthly bills.
Take advantage of the extra funds and redirect them towards retirement accounts, such as a 401(k) or an IRA. Increasing your retirement savings now can provide you with a more comfortable future, free from financial stress.
Debt is your enemy in retirement, but paying it down early is like giving yourself a raise in retirement. One strategy I used to prepare for retirement was paying down large chunks of debt in the last couple of years of working when my income was at its highest level.
This prepared me for a loss of income in TWO WAYS:
First some context; two years before retirement we installed a new roof and solar panels. After it was paid for, we owed about $20,000 on a home equity loan. We paid the entire amount off in about 15 months by making large monthly payments and by directing extra income from other sources towards the loan. By making larger payments on our home equity loan, my wife and I learned to live on much less than we were earning.
Secondly, by paying this debt early, we eliminated a payment that would have eaten away at our standard of living in retirement. Retirement savings is important, but any debt you can eliminate while you are still working is like giving yourself a raise in retirement. If we still were paying off our home equity loan in retirement, it would have meant $200 less income to spend on the things we enjoy.
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