If there is one personal finance tactic that almost everyone can agree on, it is the value of saving for retirement, or at least saving for your second act. There will come a point where you can finish the job that you are doing right now. no longer want or can, and if you switch to something else, it means a significant drop in income. When that point comes you will be happy to have every drop of savings. Life without retirement savings can be incredibly challenging.
What about social security? It helps, but Social Security alone is a pretty worn out existence in retirement.
While retirement planning sounds great on paper, it can be difficult to actually put into practice, especially if you’re making a small income. The median American household income is less than $ 70,000 a year, which means the majority of American households make less than $ 70,000 a year.
In this situation, finances can be a real challenge. Contributing to things like retirement can be hard to justify when you’re worried about the rent being paid, or the ominous noise of your car, or that everyone will have enough to eat. How do households with relatively low incomes save for retirement?
It’s important to note that if you have a relatively low income, you won’t need millions of retirement savings to replace your income. Don’t get caught up in people talking about the need millions to retire. You don’t need millions to retire.
Start now. Do not wait.
When it comes to retirement savings, it’s better to save just a tiny amount now than to wait until later. Save as much as you can, as early as you can, even if that amount you can save now is only a few dollars a week.
Why is that so important? It’s because of the power of compound interest.
Let’s say you will retire at the age of 70 and between then and now your retirement investments will bring back 8% per year. Let’s say you can only afford to put away $ 500 a year – literally $ 10 a week with a two-week break.
- If you started by age 40, you would have saved $ 50,000 for retirement.
- If you started by age 30, you would have saved $ 160,000 for retirement.
- If you started at 20, you would have saved $ 370,000 for retirement.
Why is there such a big difference? It’s compound interest. If you invest your money and just let it sit there and grow, it will grow faster and faster and faster the longer it sits. The sooner you start saving, the more time you give it to just sit there and grow, and faster and faster over time. If you wait 10 years you will lose a quantity of growth.
The point is simple: take action noweven if you can only take small steps.
Prioritize your daily finances
The first and most important steps you can take are not about retirement planning at all. That includes getting your daily finances in order. There are likely already financial barriers making it difficult to save effectively for retirement. So take care of them as soon as possible.
First, pay off your high-interest debt. Any debts that you have with a double digit interest rate must go. Credit cards. Payday loan. Get rid of them asap.
Second, build one cash register Emergency fund. Get rid of credit cards or payday loans for emergencies. Put cash in a savings account somewhere – and if you don’t or can’t get one, save it at home first. After all, you’ll want to set up a savings account with a bank, which you should do once you’ve built up cash.
How can you afford to do these things? Live as cheaply as you can take. It’s okay to relax and indulge yourself, but look for ways that don’t involve dumping money out of your pockets. Treat yourself to long walks without your cell phone. Invite a friend to do something for free. Lose yourself in a book from the library. Don’t get pampered by buying things or paying for experiences. If you can’t think of fun, free activities to do, here’s a huge list of ideas to start with maximum recommended to do it with friends.
If you are really struggling with financial problems, there are tons of programs out there just to help the people in your situation get back on their feet. Take a look at findhelp.org and discover what can help you out there.
When you are in control of these things, you will have less stress in your life and it will be much easier for you to find a few dollars to save for retirement.
Start small and automatic
Once you have stabilized your daily finances, start slowly with your savings. You don’t have to contribute thousands a month to retire. Indeed, it probably will destabilize Your finances and put you in a worse position.
Instead, start by making what feels like a completely manageable amount. Walk low, not high. If you feel like you can manage $ 10 a week, this will save you $ 10 a week. If you can manage more, do it but don’t push it. You are better off saving a small amount and keeping your daily finances stable than saving too much and getting into a mess.
Whatever you want to save, go for it automatically. If it’s a workplace plan, have it automatically deducted from your paycheck. If it’s your own plan (see below), have it automatically withdrawn from your checking account every week. You don’t want to have to think about it or you will find ways to dissuade yourself from it. Start small, start automatically.
Increase your savings as your income increases
If you get a raise, use part of it to increase your retirement contributions. For example, if you earn $ 1 an hour more than once while working 35 hours a week, increase your weekly contributions by $ 5 or $ 10. You’re still bringing home more than before, but you’re also saving more.
Obviously, as you earn more, your lifestyle will puff up a bit, and that means you will want to save more to maintain a better lifestyle in retirement. So if you get a raise, set aside some of that raise for the future. Just change your auto contribution when your paycheck goes up.
Use the saver’s credit
There is actually a very nice, but little-known, tax break for low-income earners who add to retirement savings. It’s called Saver’s Credit and it will really help extend your tax time.
Provided you are over 18 years of age, not a full-time student, and not claimed to be dependent on someone else’s taxes, you can earn credit for up to $ 2,000 in retirement contributions, both through workplace plans and your individual plan. This credit is worth 50%, 20% or 10% of your contributions depending on your income level.
For example, if you are a married couple who made $ 38,000 in the last year and saved $ 2,000 in a retirement account, you can claim the savings and use 50% of that amount as a Tax credit. That would mean your tax burden would decrease by $ 1,000. That is a large Deal!
Use your work account if you can
How do you save? If your workplace has a retirement plan that you can contribute to, such as For example, a 401 (k) or 403 (b) plan, use that plan. Your retirement plan contributions are charged directly to your paycheck, making it as easy as possible to sign up and move on. If you ever change jobs, roll your old plan into your new one – just ask for help. With a regular 401 (k) or 403 (b), you can defer tax on this money until you withdraw it from your account when you retire.
Some workstations offer the Roth 401 (k) or 403 (b) option. As a low-income earner, you are in a very low tax bracket, so the tax advantages of a Roth account are particularly advantageous. In a nutshell, a Roth account means you pay taxes NOW at your current tax rate rather than later at the rate you retired (Roth withdrawals are completely tax-free in retirement). The lower your income, the more likely it is that you are currently paying very little or no tax. Our pension guide will give you all the details if you want to know more.
Otherwise, start a Roth IRA
If your workplace doesn’t have a 401 (k) or 403 (b), you can still save with tax benefits for retirement by opening a Roth IRA. This is an individual retirement account that you can use to withdraw funds from your checking account. The value in this account increases and when you reach retirement age you can start withdrawing this money tax freeeven the profits.
You can set up a Roth IRA yourself with most investment houses, including big names like Vanguard, Fidelity, and Charles Schwab. Then set up an automatic small contribution from your checking account every week or every month. It’s easy!
We appreciate your feedback on this article. Contact us at [email protected] with comments or questions.