Life before and after retirement can be radically different, including the amount of income you receive. You may only be able to claim the state pension and not have significant savings to make up the difference to your old income. In this scenario, you may have to look at ways of adapting your budget to meet your new reduced income.
However, a reduced income does not mean you are in a precarious position. It involves reviewing your income and expenses with a keener eye and making vital decisions on what your priorities are for your lifestyle.
*Starling Bank will not charge you withdrawal or currency conversion fees, but some ATMs may charge a fee.
**On top of this amount, some ATMs may charge a fee
Set a Plan Ahead of Retiring
Whatever age you wish to retire at, it’s worthwhile setting aside some time to create a plan and budget. It would be ideal to do this with your spouse or with whomever you share financial responsibility. It’s best to be as realistic as possible about what your new income will be against your expected expenses.
Next, you can ask yourself: what are my long-term goals for retirement? Are you hoping to take a holiday in a particular place each year? Or join some new clubs that involve spending on activities? Retirement is an exciting phase of life, but it’s easy to get swept up in making plans that you may find expensive to maintain in the long term.
Think seriously about potential lifestyle changes. Retiring is an excellent time to take stock of your home and possessions. Could you downsize to save on rent or release money by selling your property? If you are mortgage-free, this could be an ideal way to free up your lifetime investment and put the money towards your retirement income.
Getting into a Budgeting Mindset
Creating a budget from scratch can feel challenging, especially when it comes to a reduced income. Thinking about why you're budgeting can help make the process easier.
Budgeting enables you to take control of your income and expenses and be accountable, putting you in a positive position with full control of your financial situation.
Do you want to take an annual holiday to your favourite destination or give loved one's fantastic presents on special occasions? If so, you’ll need to budget effectively on a reduced income.
An excellent way to start is to take three to six months of bank statements and look at your categories of spending, for example:
- Committed expenses such as your mortgage or rent, council tax, utility bills, car insurance, and other financial commitments.
- Essential expenses such as grocery and household, clothing, petrol, and car.
- Non-essential spending on hobbies, gifts, eating out, leisure activities, and travel.
It’s also important to be honest about your spending habits and look at what drives your spending. Many purchases come from an emotional place, so consider this when you’re feeling tempted to make purchases that aren’t essential or don’t fit within your budget.
Balance is also important, and adapting your budget to fit your new income doesn't mean you have to give up your favourite luxuries. Consider what you may need to cut from your current lifestyle if your projected income will vastly reduce.
Many websites go into detail on how to create a budget, whether it's on paper, a spreadsheet, or using an app. There are also many tools available to categorise your spending and give you an idea of how much cash you'll have left each month.
Ensure that you give yourself some wiggle room to make the odd impulse purchase or to cover unexpected expenses that crop up.
Ensure You are Receiving all the Benefits you are Entitled to
Depending on your age, you may be entitled to more support than you initially thought. Every UK citizen is entitled to a state pension depending on what they have contributed via NI over time. There is another benefit called Pension Credit, which tops up those with a smaller pension to a guaranteed minimum level.
You may also qualify for the Winter Fuel Allowance or help with your council tax. Even if the additional support is small, it can make a difference in your overall budget.
Avoid Building up Debt you Cannot Afford to Repay
It's tempting to put significant purchases on credit. However, doing this too often without considering how you will pay it back on a reduced income can leave you in long-term trouble. If you have sufficient wiggle room in your budget for credit repayments, you might consider smaller credit agreements, especially those with long periods of 0% interest. But generally, it's best to avoid using credit, especially if the interest rate is high.
Consider Part-Time Work
If you feel that your reduced income doesn’t match up to your lifestyle expectations, you could consider asking your current employer about reduced hours. This ensures that you still receive some income and enjoy more time off. Or you could find some part-time work in your local area.
Part-time work can help you remain active as well as increase your monthly income.
Buy in Bulk and Look for Discounts
Many websites offer access to discounts and coupon codes, so consider looking at these when you next want to make a purchase. Discount stores often sell branded or equally good unbranded items much cheaper than large chain supermarkets. Budget supermarkets such as Lidl or Aldi are excellent ways to save money on your weekly shop without compromising on quality.
Buying in bulk can save you money in the long term, as well as ensuring that you don’t run out of essentials! You could consider bulk-buying items such as toilet roll, paper towels, laundry detergent, toiletries, and dried food such as flour and rice. Buying larger packed items may seem more expensive initially. However, on a per-unit basis, it can be much cheaper than buying single or small items.
In summary, learning to live with a reduced income can be a fun challenge with budgeting and considerate buying. When you retire, you may find that the reduction in expenses such as commuting means you can maintain your current lifestyle even on a reduced income.