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Preparing your budget strategy in retirement

Written by Marianne Heron with Paul Britton

What should your retirement strategy include?

  • It is never too late to start. Compile a clearly defined SHARED strategy with goals and a sound budget to achieve these goals. The Pensions Authority website has a helpful budget planner. www.pensionsauthority.ie
  • Live within your means and stick to your joint budget. Forget about the Joneses.
  • Consider working longer, starting a second career or having a part-time job. According to a US study carried out by the Centre for Disease Control and Prevention people who don’t retire fully have better health. Check on the tax implications of extra earnings.
  • Actively maintain your physical and mental health, investing time in your wellbeing is worth its weight in gold.
  • Have an emergency fund of at least two months income.
  • Continue to save. Even in retirement you should be putting money aside.

Can you be a millionaire?

The book; The millionaire next door by Thomas Stanley and William Danko investigates how the average person becomes wealthy. It is not about high- powered systems to win on the stock market, but the slow process of reducing your expenditure and building up savings. Their study on a range of millionaires found that they had accumulated their wealth through living below their means and not trying to keep up with the Joneses. People who become wealthy are very careful about using credit, saving for things before they buy them. They have a budget and carefully control their expenditure. They live frugal lives, invest wisely and they budget. So perhaps now is the time to start budgeting!


Some guidelines for your shared budget

There are two ways to go about compiling a retirement budget.

Calculate how much you think that you will need in retirement and then have your investments assessed. Decide on your goals, compile a budget and get professional advice on how much you will need to invest to achieve them. Irish Life have a pension calculator that can help you with this.

Or assess how much you will be earning and then budget accordingly.

When preparing a retirement budget, it is often difficult to determine your exact income before you actually retire. To get around this some financial advisers recommend that you take your working income, halve it and then see if you could live on this. The reality is that very few professional people have a budget. Even more concerning is that very few couples actually compile a joint budget, but retirement planning should be a joint exercise and the need to compile a retirement budget together is essential.

Changes from your working income

  • Reduced income. As well as the drop from salary to pension you may lose some sources of income support such as mileage and mobile phone allowances.
  • Health costs. You will probably want to continue your health insurance payments. You will also need to budget for items not covered by the scheme or take out additional top-up cover.
  • Decrease in costs. The following elements are going to decrease:
  1. Income tax Pay As You Earn (PAYE) will end and Pay Related Social Insurance (PRSI) does not apply after 66.
  2. Mortgage payments. If you have planned well these should have ended.
  3. Job expenses. You will no longer have expenses such as travelling to work and office wear.

What has your spending pattern been?

It is vital to keep track of how you spend your cash. It is advisable to get a home accounting system and keep regular track of your expenditure. Gather information on your expenditure over the years. There are two ways of doing this: the laborious way of going back into your banking and other records; or compiling accurate records of your expenditure (you may have done this already) every month.

Categorise your expenditure grouping them as follows:

  • Obligatory (you have little choice) – income tax, rates, insurance.

  • Savings – this should automatically be deducted (stop or debit order) from your available income.

  • Needs – what you require to live comfortably.

  • Periodic costs – annual costs such as car licences and NCT (National Car Test).

  • Wants – the nice-to-haves.

Allocate amounts to the various categories. At this stage, you will need to consider how to reduce your expenditure so as to live below your means. Remember this is how millionaires are made.

If you can’t balance the budget

  • Get rid of your debt.

  • Postpone retirement and keep on working, maintaining your earnings to build up savings.

  • Cut out some things like a second car.

  • Think of post-retirement work or turn your hobby into an income.

  • Investigate ways to reduce energy bills: SEAI (the Sustainable Energy Authority of Ireland) have grants for energy-saving measures.

  • Every little bit counts.

Cash creation

Continuing to use your skills by offering consultancy, freelancing, offering services like grinds or teaching are obvious ways to bring in income. If you have space to spare you might consider renting rooms on www.Airbnb.com, also part of the sharing economy and a hugely popular hospitality site which connects you with travellers from around the world. This income is taxable. Alternatively the Rent a Room Scheme is a great way to capitalise on a spare room and the first €12,000 is tax free. Hobbies can become businesses, with artists offering art classes, gardeners selling plants, handymen making anything from dolls houses to dog kennels. Up-skilling can equip you for earning. Aromatherapy, counselling, language teaching  eg TEFL (Teaching English as a Foreign Language), cheese making are just some ideas. Offering services like dog walking, childminding or becoming a valet (running personal errands) for busy people will keep them and your bank balance happy.

This excerpt was taken from Rewire Don’t Retire, sponsored by Irish Life and Active Retirement Ireland. You can download the full guide HERE.