Whether it’s moving into retirement, becoming self-employed, or both, the transition can take some time to make and present certain challenges. And the first year of that transition can be integral to making or breaking your chances of success. In fact, in some ways, the first year of self-employment may be somewhat similar to the first year of retirement.
Having been self-employed for six years myself, I know how tough making the change can be and can relate to how it may be similar to retirement in certain ways.
Planning is critical
Planning for the move into self-employment or retirement can be crucial, both pre and post move. There could be a substantial drop off in income in either situation, and being prepared sooner than later can help avoid having to scramble to make up lost ground later on.
Developing backup plans relating to supplemental income, cutting expenses or both can be a good idea when entering the initial phase of retirement or self-employment. Having an idea of where to cut and in what amounts when it comes to discretionary spending like travel, meals out, and entertainment can be the first phase. Then there may be cuts to more stable expenses such as utilities, transportation, food, and housing. Then of course, having a plan to add income if necessary through side jobs, freelance work, or even resale or online selling options can bolster cash flow if necessary.
Over or underestimating
Overestimating income levels or underestimating expense levels can leave both the self-employed and retired in a bind, especially during that first critical year. Tracking expenses ahead of time can provide better estimates of where you might be with these aspects before you make the transition.
Before making the move – whether to retirement or self-employment – consider tracking your current expenses and income for at least several months, if not several years. Not only will this give you a better (although not exact, since both aspects may change after you make the move) idea of what your remaining expenses and income will be, but it can improve knowledge relating to how these financial aspects change and how you can control them, finding it easier to identify ways to cut expenses or increase income should the situation call for it.
Too much time
With too much time due to not enough work, it can leave both the retiree and the self-employed person unmotivated and looking for something to do. This ennui can lead to extra or excess spending. When everyday seems like a Saturday, the inhibitions and restrictions that had previously been enforced by a regular work schedule can be slackened. Pair this with potentially higher expenses either related to work as a self-employed individual or health and medical costs, entertainment, and travel in retirement, and spending can go up at a time when income is at a premium.
Therefore, having a good grip upon spending and income levels through regular tracking can help keep the first year of retirement or self-employment better regulated. And having backup plans should things not go exactly as you expected can help you stay on track, even when that track is a little bumpy.
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The author is not a licensed financial professional. This article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.