Saving for Retirement (and Other Long-Term Goals) on a Variable Income

Photo: Nora Dunn

If you have a freelance or otherwise variable (and in many cases – unpredictable) income, then saving for retirement can be tricky. Setting up an automatic savings program is risky since you may not have enough income to cover your payment on any given month, but leaving the contribution up to disciplined manual contributions could mean discovering that the money has been spent already and there is none left to save.

Here is a solution that allows you to effectively save for retirement on a variable income while reducing the discipline required to do it all on your own. This solution is best implemented once you have at least a year or two of variable income under your belt in your career, so you can start by making some basic calculations as outlined in the steps below.

Step One: Determine What Percentage of Your Income You Will Save

Ideally you have already determined what percentage of your annual income you can afford to (and are prepared to) save given the retirement lifestyle you wish to have. If not, now is the time.

EXAMPLE: Purely for the purposes of this illustration, I will assume that you have an average annual income of $50,000 and are prepared to save 10% ($5,000) per year for retirement. (These are by no means the recommended numbers, as your retirement plan depends on many factors, including your age, income, investments, and financial prospects. Please consult with a financial planner to incorporate this strategy into your personal financial plan).

Step Two: Determine Your Lowest Income Month

Since this strategy is best accomplished with a history of your variable income to rely upon. Now is the time to review your records. What was your lowest income month? Is this a function of the time of year, or a fluke? If you see a trend of lower-income months, then identify your lowest predictable income month.

If you anticipate that there could be lower income months than what you have historically experienced, then use an estimate of what your lowest income month could look like. Try not to be too stingy with this number though, since an unpredictably low income month can be dealt with at the time of earning (or lack thereof). Adjustments can always be made. Try instead to be realistic, and stick close to your actual lowest-income months.

EXAMPLE: Although the average monthly income for a $50,000 career is $4167, let’s say your lowest income month is $2,000.

Step Three: Set up An Automatic Savings Plan

This automatic savings plan will go directly into your retirement savings account, and should reflect your desired retirement savings percentage, applied to your lowest income month. The reason for this is the assumption that if you saved 10% of your average annual income (which works out to over $400/month in the example), you may find yourself too strapped for cash to keep a standard automatic savings plan in place. If you base it on your lowest income month, then you stand a chance of being able to maintain this automatic savings plan over the long run.

EXAMPLE: In step one, you decided to save 10% of your annual income. In step two, you determined that your lowest income month is likely to be $2,000. Thus your automatic retirement savings plan should be 10% of $2,000 – which is $200 per month. This should be affordable, even given the lower income. Read on for variable income management tips to help you navigate fixed expenses and variable income.

Step Four: Make Manual Contributions Each Month (or Periodically)

Although you are saving $200 per month, this will not satisfy your need to save 10% of your annual income. It is simply a baseline contribution. Thus each month, you must also tuck away 10% of your income over and above your lowest income base line.

EXAMPLE: One month you earn $3,000. This is $1,000 more than your $2,000 lowest-income baseline, so you need to save 10% of the extra $1,000 (which is $100).

Another month you have a great run and earn $8,000. Subtract your $2,000 base line, and you are left with $6,000. 10% of $6,000 is $600, which is the amount you need to save for retirement that month.

Note: Although you do not necessarily need to make manual contributions each and every month if it is a huge hassle, it is imperative that you at least set aside this money somewhere that it won’t be touched and can be earmarked for your retirement contribution for this year.

Step Five: Review the Plan Annually

If you find that your lowest-income months are trending higher, then increase your baseline automatic contributions each year to reflect the new low-income month. This way you can continue to save a proportionate amount of your income automatically, and you reduce the amount you will have to save manually.

EXAMPLE: It has been a while since your income was as low as $2,000. Instead, you are now finding that your lowest months are $3,000. Increase your automatic contributions to $300 per month (10% of $3,000).

Alternately if times are tough and your income has dropped, you can lower your automatic contributions accordingly.

Advantages of This Plan

  • Despite a variable income, you can take advantage of dollar cost averaging for retirement.
  • At least some of your retirement savings is automated, which increases your chances of overall success in saving for retirement. Leaving 100% of your retirement contributions to manual discipline is rarely successful, especially if you are not incredibly fastidious about setting money aside.
  • When your annual income is higher than expected, you will still be saving an accurate and proportionate percentage. Assuming you can write off retirement contributions, it is beneficial for tax purposes to be saving a percentage of your income rather than a fixed dollar amount.
  • When your annual income is lower than expected, you won’t have to satisfy retirement contributions that leave you too strapped for cash.

Additional Variable Income Management Tips

Since some months have a disproportionately large income and others similarly small, managing all your monthly expenses is tricky. To combat this, you must ensure that you do not spend everything you take in on the higher-income months.

Instead, keep the extra income on high-income months tucked away in a high-interest savings account which can be accessed to cover your expenses on low-income months. This is not your emergency fund: this is your slush fund to cover off your variable income. This is a basic principle of living with a variable income which will help you navigate the stress of managing the expenses during low-income periods.


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Guest's picture

Great tips here, this is a great way for freelancers to save for retirement. thanks for the blog!

Guest's picture

You are a crazy woman! Sure in an ideal world.
BEFORE the recession and the loss of so many jobs and retirement accounts this was a reality.
Now there are many of us(entire families) that are living on less than $20,000 a year! Our retirements are gone and we can barely pay our monthly mortgage and living expenses.
We come to this website for good advice on how to survive it, not to be shown what we no longer have by those that remain the "haves" in our society today.
Why not figure out how to help the "have nots" in a real and timely fashion and write about THAT!
This is what is truly needed in this messed up economy of today!

Guest's picture
Raghuram Molla

You would be saving a lot more if you learned to live off your lowest earnings.
So in your example, if you learned to live off on $1800 a month (assuming you already save 10%) and save everything more than that, then you would be in a better position.

Give us something more challenging.

Guest's picture

Actually living on less is challenging. Not only will you save more money living on less, but by becoming accustomed to it, you'll be better prepared to retire.

Not many people are going to be able to retire the way people live today.

Guest's picture

But in retirement costs like clothing and professional attire disappear. There are a lot of costs associated with working.

Guest's picture

And zero happens a lot. But then we get the big 20k and then some more zeros and then a 15k...any ideas on how to plan for that?

Up until recently we had a reliable income from one of us. But now that is in jeopardy and we have no idea how to restructure with one wildly variable income.

Nora Dunn's picture

@MrsCasanova - Thank you for the comment! Glad the article was useful.

@Guest (#2) - I am sorry if this article is a painful reminder of a less-than-ideal situation that you are evidently experiencing as a result of the economy. I must note that not all people in all the countries who read Wise Bread are feeling the financial pinch as much as others, and I try to write timeless pieces geared towards many applicable Wise Bread demographics. I think you will still find that Wise Bread publishes a number of articles that will still be very useful for you at this time.

@Raghuram Molla - Absolutely - if we could live off our lowest earnings, that would always be ideal. But with a truly variable freelance income, sometimes this is just not possible. Although the low income month numbers I chose for the example might be workable for some people, there are almost always months when it is not possible (as @Connie #6 points out).

@Kevin (#4) and Guest (#5) - Great discussion about what is required to live a retirement lifestyle. This is different for everybody, but it is indeed true that many of the expenses (both fixed and elective) disappear in retirement, depending on the choices we make.

@Connie - You bring up a valuable point; how do we deal with the zero months? This is partly why having a little history to rely on for determing your low income months is valuable. If your income swings wildly from $0 to $20k (as can happen), then being vigilant about squaring away the excess on the good months is crucial. You can still set a baseline automatic contribution schedule that you think you can handle (even over a stretch of $0 income months), since you will have money set aside to cover it, and you can continue to make manual contributions too. It is a matter of knowing yourself and how you specifically manage your finances.


Guest's picture


Guest's picture

What about automating both retirement saving AND the slush fund? The key is that the slush fund is a dual-function account (it is sometimes a spending account and sometimes a savings account as opposed to being just one or the other).

For example, you might always (or automatically) divert 10% of all income into a retirement savings account and an additional 10% into the bank account where you have decided to keep your slush fund. On high income months, the slush fund goes untapped. When low income months hit, you either transfer the necessary funds to your spending account or spend out of the slush fund account (depending upon what works for you). The 10% still goes into the slush account, but it (or it and more) will sometimes be used that month.

Nora Dunn's picture
Nora Dunn

@Guest (#9) - That is the next step to this strategy, and a great one at that! All it requires is the discipline to not over-spend the slush fund monies, and/or to keep an eye on your bank account to ensure there are always enough funds in it to satisfy your obligations. Cheers!