A Savings Challenge: Saving for Retirement with Unpredictable Income
July 27, 2020 Author: Tess Downing, MBA, CFP®, Complete View Financial
Saving for retirement is an exercise in self-discipline, even when you’re earning a stable income; however, saving for retirement with unpredictable income is a whole new level of difficulty.
First, you have to define how much you want set aside today for tomorrow’s security and pleasures. That is: your retirement plan. Then you can work backward from your monthly income (net of your contribution to savings) and accommodate your fixed monthly expenses in a way that you’re always covered. Whatever’s left is for discretionary, fun spending.
It’s a little more complicated than that, but you’re dealing with a steady, predictable pattern.
Enter commission income.
Commission income does not mean scarcity. It just means that you don’t know exactly when commissions will reach your bank account, particularly when linked to products or services with longer sales cycles, or infrequent, higher-ticket sales.
The key is to find workarounds that provide greater predictability and, as a result, the ability to meet your retirement savings goals.
Workaround #1: Know your expenses intimately
Your first goal is to remove all surprises. If you don’t have a system to control expenses, such as an app that provides historical reports, gather up last year’s financial documents to define your likely monthly expenses for the next 12 months. These should include online bank and credit card statements, bills, receipts, your tax return and anything else that reflects an expenditure.
Divide your expenses into three lists: fixed, variable necessities and variable discretionary expenses.
- “Fixed” would include housing, car and insurance payments, Internet and cable services and any regular payments that have to be paid each month.
- “Variable necessities” are things you can’t live without, but that vary, like groceries, utilities and phone, for example.
- “Variable discretionary” are things you can live without, if necessary, such as dining out, entertainment and clothing.
Build a monthly spending projection that plots your expenses in the months you need to pay them. For example, don’t spread a 6-month, $600 car insurance premium due in January over the next six months at $100 a month. Acknowledge payments when they’re due.
And don’t forget your tax bill if you’re not an employee whose employer is withholding for taxes, Social Security and Medicare.
Cluster your fixed, variable necessities and variable discretionary expenditures so you can quickly identify each category in your spending projection.
Workaround #2: Set up a cushion account
First, revisit your income last year to familiarize yourself with the amounts earned and any possible pattern of income payments.
Then fund a readily accessible bank or money market account with whatever excess cash you have to start, and deposit any commission earnings into that account. It should be an account that’s separate from the “spending account” you use to make payments of expenses.
By reviewing the spending projection created in the last step, you’ll have a good idea of your total outflow and the timing of those outflows.
When you can, set part of your cushion account aside as a reserve account for emergency or unexpected expenditures. This is the “emergency fund” everyone talks about, and that may equal 1-2 months or 3-6 months of expenses, or more. If you don’t have one, start one. Nothing will derail your spending plan faster than a new transmission for your car or a hospital bill.
Workaround #3: Create your own predictability
Based on the balance in your cushion account, each month decide what you will transfer to your spending account to cover the month’s expenses. With the information you’ve developed of fixed, variable necessities and variable discretionary expenses, you’ll have a good feel for how generous or conservative you can be that month. That is: after you cover the fixed and variable necessities, how much can you afford to spend on variable discretionary expenses.
You may have to prime your cushion account in the beginning until you have ample to bridge the gaps between commission payments. It may call for some sacrifice to start, but once you get to the point where you know you will always have enough to transfer from your cushion account to your spending account for required payments, there’s a comforting feeling of predictability.
When large commission checks come in, decide what would satisfy your natural wish to celebrate. But temper that spending by keeping in mind the incredible absence of stress that comes with knowing you can pay your bills each month.
Workaround #4: Add “saving” to your expense list
When you make “saving” an expense item, saving becomes automatic. Saving may be harder to do while you are building your cushion account, but add it as soon as you can. And instead of leaving those funds in your spending account, move them regularly to a “saving” account somewhere where they are available to invest or apply according to a financial plan you have or one you create with a financial advisor.
Workaround #5: Create accountability with someone
To be our best, it helps to hold ourselves accountable to another human being. It could be someone who knows your dreams and vision for the future, or your financial advisor.
What’s certain is that you need a plan for the future. That’s the only way to know if you’re meeting your goals. And a financial plan that feeds into a retirement plan is a perfect tool. Not only are you fulfilling your ongoing financial priorities, but factoring in your long-term financial needs.
Financial priorities could include:
- Maxing out your IRA, SEP IRA or other qualified retirement accounts for the year
- Down payment on a new car
- Down payment on a house
- “X” dollars a year into investments
- Vacations, treats and toys (life should be fun, too)
And by developing a list of priorities, putting them in their order of importance to you, and assigning some rough deadlines, you know where to apply the money that is accumulating in your “saving” account.
Pulling it all together
For someone with a predictable income, saving can mean following a standard “x” amount per month invested in long-term savings goals. The unpredictability of commission income makes that virtually impossible. Saving for retirement with unpredictable income is especially challenging.
Instead, it takes a bit of work, but by creating predictability with tools like cushion accounts, you can be just as successful in meeting your financial goals. In fact, the nature of someone who thrives in a commissioned environment is such that, with just a little extra planning, you can actually be more successful.
If you think Complete View Financial can help with your planning process – or be the gentle voice of accountability as you meet your goals — do call us for an initial consultation.