How To Build a Retirement Plan When Your Income Isn’t Reliable
Building a retirement plan can give you more financial flexibility in your 60s and beyond, but all of the necessary saving and investing is a bit more difficult with a volatile income that’s different each week.
It’s easy to invest the same amount each week and build an emergency fund over time when you receive the same paycheck, but you can save money even if your monthly income fluctuates. Here’s the playbook.
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Calculate Your Average Monthly Income Over the Past Year
Some people earn $5,000 in one month and proceed to earn $3,000 the following month due to fluctuating demand for their products and services. One way around a volatile income is to calculate your average monthly income over the past year. For instance, if you earned $120,000 over the past year, you average $10,000 per month.
In this example, if you want to invest 10% of your income, you should average $1,000 per month. You can invest a higher percentage of your income during more productive months, so you can get away with investing a lower percentage of your earnings during slower months.
You can also check in on your progress each quarter to ensure you are investing at least 10% of your earnings. A quarter can provide enough time for volatile months to even out, but some people may need six-month windows, depending on their business models. Any money that you won’t need until retirement should go into a Solo 401(k) or SEP IRA for your business and a personal IRA.
Build an Emergency Fund Before Investing in Assets
Investing in stocks works well until those assets lose value and you have to sell some of your shares to cover emergency expenses. An emergency savings account that can cover six to 12 months of living expenses can solve this problem. It gives you enough time to keep up with living costs during emergencies and lets your portfolio grow undisturbed.
You should only invest money that you won’t have to touch for multiple years. While an emergency savings account is important for anyone, it’s more valuable for people who have volatile incomes. Raising your income, lowering your expenses and finding a high-yield savings account are your only three options to accelerate your emergency account’s balance.
Aim for Enough Cash Flow To Cover Retirement Expenses
Your living costs will look different in retirement. People tend to spend more money on healthcare while having lower housing, grocery and transportation costs. Calculating what your monthly retirement expenses will look like in retirement can help you map out how much money you need to keep up with costs.
The 4% withdrawal rule is a popular strategy that involves living off 4% of your portfolio. For instance, someone who spends $50,000 in retirement needs a $1.25 million portfolio to live off their nest egg. However, you will also receive Social Security, which reduces how much you need in your portfolio to end up with $4,167 per month.
Dividends, interest from a high-yield savings account and a pension all add up. Creating or logging into your my Social Security account lets you see your projected Social Security benefit and how much it will grow if you defer it.
Invest Based on Your Risk Tolerance
Each investor has a different risk tolerance and it’s important to keep that in mind when planning for your retirement. Your risk tolerance dictates how you allocate the money you have set aside for investments.
Younger investors have more time to weather market downturns and corrections. Growth stocks make more sense for this group of investors and they can also find several dividend growth stocks with low yields and high dividend growth rates. This combination results in low cash flow now but often yields high passive income by the time a young investor is ready to retire.
Older investors who are approaching retirement do not have as much time for risky assets. While it can be beneficial to allocate a small portion of capital to growth-oriented investments, investors with low risk tolerances tend to focus on high-yield dividend stocks with low volatility.
Regularly map out your progress so you can see what adjustments are necessary to move closer to your long-term financial goals.
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This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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