How to budget in retirement on a fixed income

A retirement budget is a monthly budget with two changes: the income arrives from several sources on fixed dates, and there is no raise, overtime, or bonus to absorb a bad month. Budget the income as fixed monthly deposits from each source, and budget the expenses in three layers, the essentials, the irregular costs, and the discretionary spending, with the irregular layer sized from history and funded every month. The irregular layer is where fixed-income budgets break, because a working household paid the roof and the transmission from slack that no longer exists, and a retired household has to pay them from a fund it built on purpose.

What changes when the income is fixed

A paycheck budget has give in it. A large repair in March is covered by a slightly better April, a bonus, some overtime, or a raise that arrives in time. A fixed income has none of those, so every irregular expense that is not planned comes out of savings, and savings that are drawn for repairs run down faster than the plan assumed.

The second change is that income is several deposits rather than one. A government benefit on one date, a pension on another, a transfer from savings on a third, sometimes a part-time paycheck on a fourth. The budget treats them as one monthly income figure, and the dates decide which bills each deposit covers, the way paychecks did.

Budget the income as fixed deposits

1. List every source with its monthly amount and its date: the government benefit, any pension, the transfer from retirement savings, part-time or rental income.
2. Set the savings transfer as a fixed monthly amount, decided with whoever advises you on the accounts, and move it on the same day each month. It is income for the budget, and its size is a decision made once a year, not each month.
3. Add them up. That is the month's income, and it is the number the three layers have to fit under.
4. Assign the bills to the deposits by date, so that each bill is paid from money that has already arrived.

Budget the expenses in three layers

The irregular layer is the one that did not exist as a line before. Its shares are sinking funds: two years of home repairs divided by 24, the next car's cost divided by the years until it is needed, the dental work that comes every few years. See How to budget for car repairs and other expenses with no schedule for the method, which applies to the roof as well as the car.

A worked example, a $4,600 month

The essentials take half the income, the irregular and discretionary layers a fifth each, and $300 a month goes to a cushion that absorbs a month where the irregular funds are not enough. A household that ran this month without the irregular layer would read $1,300 of discretionary room and would spend it, and the first roof repair would come from the retirement savings, which was not sized for roofs.

Keep the savings transfer fixed

The transfer from retirement savings is the line that is tempting to move, because the account is right there. Keep it fixed for the year and change it only at an annual review, with the account's balance and the year's real spending in front of you. A transfer that rises to cover a bad month has raised the household's permanent draw by that amount, and the account is being spent at a rate nobody chose. The irregular layer and the cushion exist so that the transfer never has to move mid-year.

Common mistakes

• Budgeting without the irregular layer. The discretionary room looks large, is spent, and the repairs come from savings.
• Treating the savings transfer as flexible. It is the one line whose size compounds over decades.
• Sizing health costs from the premium alone. Copays, prescriptions, and dental are the part that varies, and two years of history sizes them.
• Keeping the working-years discretionary amount. It was funded by slack that no longer exists; the discretionary layer is sized from what is left after the first two.
• Skipping the cushion. A fixed income with no cushion turns every surprise into a savings withdrawal.
• Reviewing the budget monthly. Read it monthly, review it yearly. A fixed income does not need monthly adjustment; it needs a yearly one done carefully.

Common questions

How do I budget when income comes from several sources? Add the monthly amounts into one income figure and assign the bills to the deposits by date, so each bill is paid from money already in the account. The budget does not care which source paid which bill; the calendar does, and a bill assigned to a deposit that lands after its due date needs a moved date or a small buffer.

How much should I set aside for irregular expenses in retirement? What two years of your own history says, divided by 24, for each kind of irregular cost: home repairs, the car, dental and vision, gifts, travel. In the worked example the irregular layer is about a fifth of income, and for a household with an older home or an older car it is larger.

Should the savings withdrawal change from month to month? No. Set it once a year as a fixed monthly transfer, with the account balance and the year's real spending in front of you, and let the irregular layer and the cushion absorb the months that run high. A withdrawal that moves with the month is a draw rate nobody chose.

What about the year's big expenses, like travel? They belong in the irregular layer as a monthly share, so a $3,600 trip is $300 a month and is paid for when it happens. A trip paid from the retirement account in the month it happens looks free and is not.

How often should a retirement budget be reviewed? Once a year, in the same month, with the account balances, the year's spending, and any change to the benefit or the pension in hand. That review sets the savings transfer and the irregular shares for the next twelve months, and the monthly job is reading, not adjusting.

How Zypper handles this

Zypper budgets income from several sources as separate income categories, each with its own amount and frequency, and shows Earned against each, so the benefit, the pension, and the savings transfer are three rows that add up to the month; the transfer from a retirement account that is connected is recognized as a movement between your own accounts. The irregular layer is a set of categories with Roll over unspent budget turned on, so each month's share accumulates and a repair reduces the balance in the month it happens, with the carried balance shown beside the amount. Investment and retirement accounts contribute their balances to net worth, charted over time, which is the annual review's first number. See Creating your budget, Rolling over unspent budget, and Supported account types for the details, or get started with Zypper to lay out the three layers.