Managing Uneven Income in Retirement
Wednesday, January 09, 2013
Varying income isn't a worry only for entrepreneurs and the self-employed.
Workers who leave the workforce to care for a family member or recover from serious illness can also face plenty of uncertainty in their cash flow.
And, in the last few years, even employees who had enjoyed steady paychecks and annual increases have seen their earnings change because of layoffs, wage freezes and enforced cutbacks on hours.
That volatility is likely to continue, given the current global economic backdrop. But census data indicate this may be a pattern larger than can be blamed on the economy alone.
Many workers these days are seeing their incomes peak as early as their mid-40s and fall in the years leading up to retirement. Older workers, in particular, are dealing with a difficult hiring environment: Unemployment for workers 55 and up hit a record level in 2009 and has remained high.
"The challenge of an uneven income is that makes it much harder to save for retirement," says Donna Peterson, senior vice president in retail retirement at Wells Fargo. "But maintaining a pattern of regular investing keeps you moving forward."
The Larger Effects of Volatile Income
Some workers may experience uneven earnings for a relatively brief period, others for their entire working lives. Anyone whose income bounces around faces special challenges when it comes to saving for long-term goals such as retirement.
For one thing, if they accumulate debt during periods of lower income, paying down that debt reroutes funds they otherwise could have contributed to retirement savings. Those who must cover current expenses out of an uneven cash flow may also find it tough to make saving and investing a solid habit.
Planning Around Uneven Paychecks
Consider the following strategies to help you manage fluctuations in income:
1. Set a goal. While online retirement calculators can help you start thinking about how big a nest egg you'll need, it's important to note that these calculators tend to assume constantly rising income throughout your working years.
That's another reason such tools are only a starting point, and why it's so important to work with your Financial Advisor on creating a strategy to match your individual situation.
2. Automate your savings. Making regular contributions to your retirement plan – whether a 401(k) or an IRA – is a critical part of the savings process.
The reason: Those contributions immediately start growing tax-deferred, and by making them automatically you remove the temptation to spend that income on other items.
If you can't save through payroll deduction, you can still establish mechanisms to set funds aside automatically. For example, consider setting up a regular monthly transfer from your checking account to your IRA. You can always change the amount depending on your cash flow; the important thing, Peterson points out, is to put a regular amount into savings in good times and bad.
"Pay it like you pay your water bill," she suggests.
3. Plan for the lean times. "It's tempting to live a little when times are flush, but it's smarter to live below those higher means so you can set aside an emergency fund," Peterson says.
While the standard rainy-day target is three to six months of living expenses, those with irregular incomes might want to aim for more, such as nine to 12 months.
Also consider how you would handle particular events such as having to pay the full cost of health insurance out of pocket, in case of separation from your employer.
Plan for the reverse as well: How would you handle a bumper year? Would it be more strategic for you to use the additional earnings to pay down debt or to increase your retirement contributions – or a combination of both?
Talking with your Financial Advisor about your priorities both before and during retirement can help you prepare for whatever comes your way.
 Bureau of Labor Statistics and the Census Bureau, http://www.census.gov/prod/2010pubs/p60-238.pdf, page 13 of 88-page PDF.
 Bureau of Labor Statistics data, http://www.bls.gov/opub/ils/summary_10_04/older_workers.htm.
This article was written by Wells Fargo Advisors and provided courtesy of Terry R. Campbell, Senior Vice President - Investments in Chardon at 440-286-2553.
Investments in securities and insurance products are: NOT FDIC-INSURED / NOT BANK-GUARANTEED / MAY LOSE VALUE
Wells Fargo Advisors, LLC, Member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company.