The question of what people would do if their income in retirement declined significantly comes up quite a bit, and the generic answer seems to be that everyone would just tighten their belt a bit ie cut their living costs. Which sounds great and sensible and all that wonderful stuff, but the reality is that it probably wouldn’t be quite that easy.
I’ve talked previously about our fixed living costs but I wanted to expand on this a bit more and explain why it means that there is only so far that belts can be tightened.
A pretty common figure for how much people say they want in early retirement is around the $40,000 mark. Which sounds like a decent chunk of money and surely there’s plenty of room to reduce that if things go pear shaped right? The problem is though that your fixed living costs generally can’t be reduced much if at all, and your fixed living costs probably make up most of that $40k pa.
Using my own situation as an example I have a bunch of bills that I really don’t have a whole lot of choice about. This covers things like council rates, house insurance, car registration and insurance, utility bills etc as well as health insurance and personal insurance.
There is no shopping around on council rates or car registration and you better believe that I shop around on all the insurance stuff. If you want to make the argument that I don’t need life insurance then please have a read of this post, although in fairness I will likely cancel some parts of it when I hit FIRE.
And sure, Australia does have a pretty good public health care system for most stuff so strictly speaking I don’t need health insurance, but I would much rather that if something goes wrong health wise for my family that we get seen ASAP rather than going on a public waiting list.
Include other important stuff like phone and internet bills and I’m up to $18,000 in costs where there really isn’t any room to move. If I add in a few things like swimming lessons for the kids, new shoes and clothes as they grow plus Kinder fees and I’m easily over the $20,000 mark.
To be sure in the next 5 years or so those Kinder fees and swimming will go away, but they will more than likely be replaced and likely increased by fees for school excursions, school uniforms etc, and in any case hopefully you get the point that I’ve got about $20k that it is pretty important to come up with year in and year out.
Then on top of that we need to eat and have all the usual groceries and household stuff that we need to buy. There’s four of us, albeit with two under the age of 5 currently although the eldest can power through an adult size meal if he feels like it. So this bill came to about $9.5k last year, and that’s employing all sort of money saving strategies like shopping at Aldi, only buying stuff at Woolies and Coles when they’re on special, using flyBuys and all the rest of it.
Don’t get me wrong there is some room to trim this budget a bit if we really needed to but chances are pretty good we’re not going to be drop it by more than a couple thousand. So now we’re up to $27.5k roughly, and this figure is likely to go up rather than down as the kids get older.
Then I probably want to put petrol in the car so we can actually drive it somewhere, it might also be a good idea to have it serviced once in a while. We always seem to have one medical issue or another come up so put on a bit more money there, and pretty quickly we’re at $30k that I really can’t cut much below without taking away something important.
We’re fortunate enough to own our own home (and no it’s not the one in the above photo!) but if you’re planning on renting in retirement then you need to factor this in as a pretty fixed cost as well.
Sure you can probably move somewhere cheaper when your lease runs out or maybe even find a sympathetic landlord who will lower your rent a bit or let you break the lease early, but this is an expense that isn’t going to go away. You can add in your own figure as to how much this is but it’s likely to be a pretty significant amount of your annual budget.
What all this means for me though is that if I were working on a $40k budget I’ve got roughly $30k that is essentially non negotiable, $10k that I can cut, and that means that three quarters of my living costs are fixed. And that other $10k is the enjoyable stuff like eating out, going to the cricket or rugby, heading out to a concert, travel and such forth. So I’d really rather avoid cutting this if at all possible.
I’ve said previously that I’m aiming for HIFIRE (or fat Fire as it’s sometimes called) as I talked about in this post which means in reality I have a lot more room to cut costs if necessary. I’ve also talked about some of the safety measures that I plan on having here so I feel like I’m going to be ok even if my income does drop dramatically. It could drop by half and I’d still be ok, just not doing an overseas trip or two every year.
But for those who are aiming for regular FIRE there is a lot less room to tighten that belt. And if you’re aiming for lean FIRE then that applies even moreso simply because as the name suggests the belt is already fairly tight!
BTW the other regular answer about what to do if your income falls in retirement is the you’ll get a job and I’m going to head this one off at the pass. The reason for your income falling in retirement is almost certainly due to a fall in the stockmarket assuming this is how you’re invested, and this is more than likely due to a recession or at the very least a slowdown. In which case very few employers are likely to be hiring because they too have their own problems with their incomes falling, and someone who has been out of the market for a few years is probably not as desirable an employee as one who is still current. So while I wish you the best of luck if this does happen, I think it is going to be hard going.
So how much room do you have to tighten your belt if your income drops once you’re already retired, and how do you plan on dealing with it if it happens? If you enjoyed this post and would like to read more like it then please subscribe!
I agree but also disagree with you.
Kids will be grown up and gone soon enough so there is big cost saving.
If you are both retired, Do you need two cars?
Would you pull the pin and never work again if you hit the your “number” or would you ditch the 9-5 and follow your passions with potential side income?
Working this hard to save and invest, I imagine they would probably have some sort of buffer to get thru any down turn? In my case I imagine I would have 5 years living expenses saved up to make it thru any bear market.
Most people on average have a lot of fat they can cut out of their expenses. Takeaway coffees, Saturday night at the pub, highest speed wifi and data phone plans, travel domestically instead of overseas for a bit.
Hi FMT!
My kids are both under the age of 5, I’m pretty hopeful that I’ll be retired before they’ve finished high school and certainly well before finishing university if they go down that path. So they’re a cost that is with me for another long while yet!
We only currently have one car actually so I’d be hopeful that come retirement we’ll manage to keep that going.
And when I retire I would ideally like it to be full retirement rather than having part time work or some sort of side gig. Obviously I’d do these if it was necessary, but I want to have lots of flexibility and be my own master as much as I can.
I definitely plan on having lots of safety nets in place, I talked about it a while back in my FIRE Safety post. As I said in this post here I’m not too worried about this for myself but I do think if you’re going for regular FIRE or lean FIRE it’s much more of an issue.
Very true, just goes to show that everyone’s path is very different
Sounds like lots of excuses.
Who pays for medical expenses in Australia? Educate yourself about the health system.
Why would you be paying for swimming lessons in retirement? Etc
I talk to medical professionals quite a bit and they all tell me that going private is much quicker compared to going on a waiting list so I’m better off having private medical cover. They almost all have it as well.
As I said in the post “To be sure in the next 5 years or so those Kinder fees and swimming will go away, but they will more than likely be replaced and likely increased by fees for school excursions, school uniforms etc,”. My kids are both under 5. I’m very likely to be retired before they are finished high school, hell if things go well maybe before they even start it. So they are going to have expenses that need covering for quite some time.
If you’ve got other suggestions I’m all ears?
Non essential surgery, you really don’t want to be on a public wait list, as it usually takes around a year. Talking from experience here (Sydney)
What would be interested to see get looked into is private health insurance vs Medicare/funding yourself.
I think the problem with Medicare/funding it yourself is that if you get stuck with an ongoing expensive problem then you’re going to be on the hook for a lot of money. After I retire I’m reasonably relaxed about coming up with anything up to say $100,000 for a one off medical expense, but if I’m on the hook for $50,000 a year for some ongoing issue then that’s a lot bigger problem. Obviously that’s reasonably rare, but then so are house fires and I still have insurance for that.
Maybe Phillip could post a list of living expenses? I’d be curious, as this is something I’m working on lowering this year too…
I currently have a side hustle that I enjoy, and it probably brings in about $200 per week. At the moment I’m using it to pay for things like car costs and the occasional bill and I reckon I’ll keep this going as long as I can. When I retire, I doubt I’ll want to trade my new lifestyle back for more time in an office, so the side hustle will be an important element of my FIRE plans. If I can’t generate reliable income from this to meet the costs of living, I’ll just suck it up in the office for an extra year or two. I have about 7 years left to tweak the hustle, or find a new one if it’s not sustainable. FIRE and side hustle should really go hand in hand, otherwise you’re at the mercy of market forces in retirement and that doesn’t really appeal to me at all.
What sort of side hustle are you doing if you don’t mind me asking? I occasionally get tempted to look into something like this but between work, spending time with the wife and kids, plus this blog I don’t have a huge amount of spare time to devote to a side hustle.
Personally I’m ok with a complete retirement from work and relying on the market to give me decent returns over time, but then I plan on having some pretty big safety nets in place so it’s less of a concern for me than it might be for others.
I have very similar commitments to you (no blog though), so I find it difficult to make it work for me at times.
I certainly don’t mind you asking, but it’s not something I feel comfortable posting about. I would be happy for you to email me (can you see my address?) and I can send you the details though. It’s nothing illegal, but experience tells me it’s not for everyone.
Safety net is a good description because currently I don’t need the money (though it all comes in handy for FIRE purposes) but knowing it’s there as a potential source of income if / when times get tough is priceless.
Personally I see where you are coming from.
The blithe responses you hear so often in the FIRE community, including “tighten the belt”, “side hustle baby” or “go back to work part time” all seem so easy but in reality I think are going to be quite a bit harder than people realise.
Firstly, a shortish sharpish correction in the market that last 6-18 months is actually not an issue. I’d say 99% of FIRE people wouldn’t even blink in that scenario. It is the extended bear market that you have to worry about.
Can you tighten your belt of 3-5 years or more? Depends on how loose the belt is to begin with. what sort of buffer you have etc. Obviously can be done but wouldn’t be at all pleasant.
Will it be easy to get a part time job in a bear market? Not so much, it is a bear market after all and you’ll be competing against everyone else who is being forced to take whatever job they can get to supplement their dwindling incomes.
Will your passionate side hustle prove profitable or just be a hobby that you enjoy but ends up costing you money? The statistics show it’s much more likely to be the latter than the former.
Sure there are strategies and tactics that can help but I lean much more towards your point of view HIFIRE. I’d rather spend the extra year or two building my nest egg so I have much more room to move.
Hi AA as you say the issue isn’t if there is a short sharp correction in the markets, it’s if we see a prolonged downturn that forces you to live off a lot less for long time. This would kill off a lot of people’s safety nets and emergency funds and all of a sudden they’re having to sell shares or property just to cover living expenses.
With respect, I can’t agree with this mate lol.
I hope you don’t take my views the wrong way! We just have different mindsets on this and that’s okay 🙂
You probably know my view on this, and I’ll write properly about it soon. I think so much of our living costs are entirely optional and that we’ve just become so accustomed to comfort and luxury as a society that we can’t imagine winding it back a bit or don’t want to change any of it.
I get the arguments and they’re all very reasonable. But I simply can’t accept that we have little wiggle room. It might not be fun, but change rarely is. In any case, that’s not the point, the fact that we can actually do it is the point. If we don’t want to that’s another matter entirely.
Also on a recession. Keep in mind that the unemployment rate might peak at 10%, meaning 9 out of 10 people are still in work, and one possible outcome is employers would cut back on full timers but be more willing to take on part time workers (maybe not straight away, but probably wouldn’t take long), which is exactly the kind of work we’d be looking for in this scenario. Even one day a week at $200 a day is $10k per year, a massive amount, and combined with your $10k of easily found savings, plugs a 50% fall in income.
If work is less desirable then more frugality would be the order of the day, and we’re certainly not above living in a rental that’s $100 cheaper per week than the one we’re in currently, another $5k. There’s a limit of course, but my main preference and mindset is to be flexible and quietly comfortable in your ability to do what needs to be done and find ways to make it work. And sadly I think many have lost the willingness to go live happily through more difficult times, which is perhaps to be expected given nearly 30 years without a recession!
When SMA speaks on a topic I like to lean in a little for a closer listen… already looking forward to your post on this!
I’m more in the HIFIRE camp of FIRE, so while I don’t necessarily agree or disagree with individual approaches to this, there are clearly many roads that lead to Rome.
Like HIFIRE, I have a family and a couple of kids. As they get older I would like to give them experiences that will cost money (travel, for example) and I also have a bucket list of things I want to tick off as I get older. I don’t want my lifestyle choice (FIRE) to unfairly impact them or my wife.
On a post of yours you replied to a comment I made along the lines of “better to have your partner on board with this” and I totally agree. I only saw the light of FIRE a few years ago, and several years into our marriage so changing her perspective about our lifestyle is heavy going.
I appreciate the SMA slant as well as the HIFIRE slant. My view is there’s no “one right way” to go about this. Maybe in 30 years when we’re all in a pub together swapping stories we might wish we could tell our current selves all the secrets and not to worry. In the meantime though, we need to plan and live according to how we see ourselves the happiest.
Anyone on the road to FIRE is a kindred spirit and I’m looking forward to swapping stories with everyone when we get there!
Haha, thanks that’s nice of you to say. Damn now I definitely have to write it!
There’s definitely no right or wrong. The subtle assertion though is that it can’t really be done, the term ‘fixed’ being the thing I disagree with.
Haha I certainly listen up when Dave speaks as well!
And yep there’s plenty of versions of FIRE as well as plenty of ways to get there.
Best of luck with getting your partner on board with you, it definitely makes things a lot easier and I’m very thankful that my wife is on the same page as me.
Hi Dave, I can see where you’re coming from to some extent. At least some of the stuff is optional, although not necessarily luxurious. Particularly for you renting you don’t have those fixed bills like rates etc although on the flip side it does mean you need to come up with some amount of rent every month or so.
You’re right in that we don’t necessarily need as much as we have, we could live without internet and phones, and I know your views on health and personal insurance which I don’t necessarily agree with but can see why it makes sense for others like yourself. And you could probably get by without a car so no rego, insurance, petrol etc. For stuff like food, well there are certainly lots of ways to spend less as you’ve written about but at some point you probably want to have a decent feed, although I wouldn’t mind losing a kilo or two…
So yes, we could make do with less, but whether or not we want to is another matter. I think what it boils down to is that there is no one right way to do FIRE, it means different things to different people. You certainly seem to be enjoying your life in retirement and that’s fantastic, it just isn’t what I would want out of early retirement.
I think the other thing that makes a huge difference to the mindset is kids. If it was just myself and my wife then we might decide that we’re more comfortable with less of a safety net, that we could get by with less and therefore retire earlier. But as Chris said below there are a lot of experiences I want to give my kids, and more importantly I don’t want them to be eating beans and rice for a year because I stuffed up our retirement calculations. So there are extra costs there which aren’t truly fixed, but at the same time are extremely desirable as I don’t want my kids to miss out because their dad stuffed up.
As far as getting work to supplement an income if you fall short once you’re retired, in my experience with the GFC living in the UK at the time it was very very difficult to get any sort of work whatsoever. It may end up being different in Australia if that happens to us though, let’s hope we don’t have to find out any time soon!
Looking forward to your post on the subject!
If we look around the globe we live incredibly luxuriously. It’s just hard to accept because we don’t see it, we simply compare to our peers/society.
I accept those choices as completely sensible. Probably the only thing I’m trying to point out is that it’s a choice, rather than it can’t be done, which is what seems to be your view in the post.
Hey man, beans and rice is amazing 😉
Damn no pressure, I’ve used up most of my arguments already lol!
Very true, and having travelled a lot I’ve definitely seen how good we have it. Funnily enough my first experience with beans and rice was in Cuba, and yep you’re right it was amazing. Although I probably wouldn’t want to eat it for a year straight. I should have gone with a better example like baked beans on toast no wait that’s also good, ramen noodles nope also tasty,damn it I’m making your argument for you aren’t I!
Most of the part-time workers during a recession come from pre-existing full time workers who are retained with reduced hours. There isn’t a miraculous increase in part-time employment, if anything there’s a reduction and you’re competing against people with recent full-time employment who are likely to transition back to full time when things improve (making them more attractive hires as they will be pre-trained and ready to go, while you look likely to go back to retirement when things improve, so that makes you less attractive).
No, in a recession, even finding 1 day a week washing dishes gets difficult. You need to have skills that you can really under-price to be attractive. Ideally in a sector which copes well with freelancers so the employer isn’t concerned that your employment is likely to be short term.
Enjoyed this post.
I agree that many of the younger FIRE people are very blasé about tightening the belt and picking up work if things go pear-shaped in the markets.
If I was happy to LEAN-FIRE I could probably retire now, but I don’t want to be sitting here counting pennies if things go bad, so I’m working towards what I consider FAT-FIRE. Others may disagree, but there’ll only be me to worry about once my kidults move out and I’m pretty cheap to run.
I agree with the need for private health insurance. I didn’t have it for years, but I don’t like the idea of being old and in pain on a wait-list. I can look after my wrinkled old future self better than that,.
Thanks Frogdancer! As I’ve talked about before I want to have a nice big safety net to catch me if things go wrong!
And I hear plenty of stories about older people waiting a very long time for stuff like knee and hip replacements. I want it done ASAP rather than being in pain for over a year!
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I enjoy reading FIRE blogs lately as I was exposed to my parents recently both retiring (they are divorced so living independently of course) and have been listening to their interesting journeys to retirement. This exposure prompted me to look into my own superannuation and reflect on my own life journey etc. My mum is targeting to try live off approx $20K or less a year (owns house outright and has no debts apart from living costs and bills) however this cost would increase for any holidays she takes. I’ll be keenly hearing her updates to see if she can stick to her budget and if she feels its a reasonable target without being ridiculiously frugual and confined to being locked in the house most of the week!
Hi Nicki, glad you’re getting into the FIRE blogs and hopefully taking action on your own situation! Best of luck to your mum, if she is of age pension age though then the maximum age pension is about $25k or so for a single homeowner I beleive, is there any reason she’s trying to live off a fair bit less than that?
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