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Saving for retirement when your income fluctuates

A reader recently asked me,

“How do you approach saving for retirement when your income fluctuates every year?”

I love this particular question as there seems to be plenty of advice available for folks that receive a steady paycheck, but not as much for those whose income varies. I would guess the reason is that it is harder to answer the question when your income changes, but we'll give it a shot here today.

One simple way to approach saving for retirement when your income varies is to save a percentage of each paycheck or commission payment you receive into your retirement account rather than a set dollar amount. This is a simple and easy way to “normalize” your retirement contributions over the course of a number of years when your income tends to vary.

Another approach that can be especially helpful when you don't receive a regular paycheck is to create your own paycheck every month. Your paycheck should be enough to cover all of your monthly expenses along with the amount you need to be saving for retirement each month. Then you can place everything else you get paid that month into savings.

When you have a month where you bring in less income or you have unexpected expenses occur, you can then use your savings to normalize your monthly paycheck and/or cover your unexpected expenses. However, if you find yourself constantly pulling money out of your savings, you might need to increase your monthly paycheck amount. And if your savings are constantly being depleted, your current lifestyle is probably above the level that your income can support and should be adjusted accordingly.

If you find that your savings account is constantly growing, in addition to enjoying the peace of mind that having a bigger cash cushion provides you with, you could also increase how much you're saving for retirement each month or even increase your monthly paycheck amount to enjoy your life a little more.

As you can see, saving for retirement on a variable income can be done even if it requires a few additional steps. If you've got a variable income and would like some help setting up a “paycheck” and making sure you're saving enough for retirement, I'd be happy have a conversation. Feel free to schedule a time whenever you're ready.