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Living on a fixed income has at least one upside: When most of your money comes from a pension, brokerage retirement accounts or Social Security, it's easy to predict how much you'll have to work with each month. The downside: Unexpected expenses or rising costs due to inflation could make it harder to pay bills. Living on a fixed income can be challenging, but budgeting carefully and thinking ahead can help. Here's how to budget on a fixed income.
1. Understand Your Income
First, figure out how much income comes in every month, its sources, how it may change and any restrictions on it. List your monthly income sources and amounts. This may include:
- Social Security benefits
- Supplemental Security Income (SSI)
- Old-Age, Survivors and Disability Insurance (OASDI)
- 401(k) or 403(b) plans
- Pension benefits
- Traditional and Roth IRA withdrawals
- Withdrawals from brokerage accounts or other investments
- Passive income from rental properties, royalties or other sources
- Income from a part-time job or self-employment
- Volunteer stipends
Next, consider how your income could change. For example, Social Security, SSI and OASDI benefits are adjusted annually to account for cost-of-living increases. In 2022, Social Security and SSI benefits increased by 5.9%.
Social Security benefits might also be affected by wages earned from a job or your net income from self-employment:
- If you're receiving Social Security but are under full retirement age for an entire year, $1 is deducted from your benefits for every $2 you earn above the annual limit, which is $19,560 for 2022.
- If you're under full retirement age for part of the year and then hit your full retirement age, $1 is deducted from your benefits for every $3 you earn above the annual limit. For 2022, the limit on your earnings for the months before reaching full retirement age is $51,960.
- Once you reach full retirement age, you receive your full Social Security benefit no matter how much you earn.
At a certain age, traditional IRAs may require taking required minimum distributions (RMDs); factor that into your income. (Roth IRAs do not have RMD requirements.)
The amount you receive from brokerage accounts, passive income, part-time jobs or self-employment and volunteer stipends can also vary depending on stock market fluctuations and how much you work. Review the amount you received from these sources last year to estimate what to expect in the coming year.
2. Calculate Your Expenses
Once you've identified your income sources, it's time to calculate your expenses. Review your spending for the past year (or at least the past several months), breaking expenses into categories, such as:
- Rent or mortgage
- Property taxes
- Insurance premiums
- Medical care (copays, coinsurance, deductibles, prescription drugs)
- Debt (monthly loan payments, credit card minimum payments)
- Dining out
- Cleaning service
What's discretionary and what's essential could vary depending on your needs. If you have mobility issues, for instance, a gardener or cleaning service might be essential, not optional. Contributions to a 529 account for your grandchildren's college fund might be non-negotiable, or a nice extra when you have the money. Categorize your expenses so they make sense to you.
Most expenses are monthly, but don't forget irregular expenses, such as home maintenance, paying taxes, car registration or buying holiday gifts. Add up your typical spending on these categories over one year and divide it by 12 to estimate a monthly cost.
3. Create a Budget
Once you've calculated your monthly expenses, you have several options for making a budget.
- The 50/30/20 budget method allocates 50% of your income for essentials, 30% for discretionary expenses and 20% to savings.
- Want to make things even simpler? Consider the 70/30 method, in which you live on 70% of your income and save the other 30%.
- Want to know where every penny goes? Try a zero-based budget. This approach to budgeting assigns every dollar a "job," aiming for your income and spending to zero out.
Savings provides a vital cushion when you're on a fixed income. Put aside money for irregular expenses and any big goals, like travel. Also build an emergency fund to cover three to six months' worth of essential expenses; use this only for true emergencies. Worried you'll be tempted to tap the emergency fund? Set up two separate savings accounts and don't touch the emergency account.
Once you've created a budget, track your expenses and income so you can see how your budget is working and make necessary adjustments. This can be as simple as jotting income and expenses in a notebook or on a blank calendar.
However, online banking and budgeting apps can simplify the process and reduce the possibility of errors. You'll be able to check your account balances, income and expenditures whenever you want instead of waiting for a paper statement in the mail. Budgeting apps linked to your bank account can update your balance in real time and display spending in different categories, revealing at a glance when and where you're overspending. A quick weekly review of your spending can help you stay on track.
4. Plan for the Future
To prepare for the future, familiarize yourself with potential changes to your future income and expenses. How much can you expect income and expenses to rise or fall? For example, Social Security benefits will rise with cost-of-living adjustments; earned income will shrink if you stop working part time. Medical costs typically rise as you age, but your housing costs might drop if you sell your house and move into a condo.
In case cost-of-living adjustments aren't enough to cope with inflation, think about ways to stretch your income. You could:
- Take bigger distributions from retirement or brokerage accounts. (Consider how that will affect your taxes and future income from the accounts.)
- Get a part-time job or start a business. Could you tutor children, babysit, work at a store (and maybe get an employee discount) or offer consulting services?
- Earn passive income by renting out a room or a vacation property.
- Get a reverse mortgage—after considering the risks and drawbacks, of course.
- Rebalance your investment portfolio for better protection against market downturns.
You could also cut spending. For example, can you:
- Cancel subscriptions
- Shop at discount grocery stores
- Eat out less often
- Refinance your mortgage to reduce payments
- Spend less on gifts
- Use prescription discount programs such as GoodRx or WellRx
If your income still falls short, investigate potential sources of assistance.
- Your state can help pay Medicare costs.
- Patient assistance programs (PAPs) can help pay for prescription medications.
- The Supplemental Nutrition Assistance Program (SNAP) can pay for food.
- Utility companies may offer programs to reduce your rates.
Use the National Council on Aging's BenefitsCheckUp tool to find federal, state and local benefits you may qualify for and get help applying.
Making the Most of Your Income
Consulting a financial advisor can help you make the most of your income at any age and ensure your retirement savings last as long as you do. Keeping your credit score in good shape can make it easier to access credit should you need it for unexpected expenses. You can help improve your credit score by paying bills on time, paying down high-interest credit card balances and keeping credit utilization low. Experian's free credit monitoring can alert you to changes in your credit report so you always know where you stand.