It can be difficult to save for retirement when you don't have a high income, especially if you're working hard just to make ends meet. In fact, the U.S. Government Accountability Office (GAO) found that only 1 in 10 low-income households near the retirement age bracket (ages 51 to 64) had a retirement account in 2019. This was down from the 1 in 5 who had a retirement account in 2007.
But while having a high income can certainly help you save money for your future, there are ways for all earners on the income spectrum to save. If it's been difficult for you or your family to save for retirement on your current income, here are some steps that could help you get started.
1. Open a retirement account
A retirement account is a savings account that comes with certain tax benefits, like tax-free growth on your investments. While retirement accounts are often offered by employers, you can also open one for free at most online brokers. Employee-sponsored retirement plans come as 401(k)s, while those available through brokers and banks are typically traditional and Roth IRAs.
If your employer doesn't offer a 401(k) plan, it might be worth exploring your IRA account options. IRAs come in two types: Roth and traditional. With a Roth IRA, you'll pay taxes on your contributions at your current tax rate. Since you pay taxes upfront, you won't have to pay taxes when you withdraw money in retirement. This is the opposite of traditional IRAs. With these accounts, contributions are tax deductible, but you'll pay taxes on distributions in retirement.
Generally speaking, a Roth IRA makes more sense if you expect your tax bracket to be higher in retirement than it is now, as you can pay taxes upfront while your tax rate is low. On the contrary, high-income earners typically benefit more from traditional IRAs, as they can defer tax payments to a time when their tax bracket is potentially lower. However, if your income is modest, it could make more sense to take the tax deduction with the traditional IRA, as doing so might mean getting more savings with the Saver's Tax Credit, as we'll discuss below.
2. Automate your contributions
Whichever retirement account you choose, it's crucial to set up a contribution schedule. Most employers can do this automatically with your 401(k) plan, depositing a portion of your paycheck into your account. Likewise, you can also set up automatic transfers from your checking account into your IRA.
If you don't have a lot of money to invest, think small. Even saving 1% of your income can go a long way in helping you prepare for retirement. For example, if you invested $35 per month and managed an annual average 10% return, you would have $113,830.00 at the end of 35 years. If you could manage $100 per month, your investment return would increase to $325,229.00.
3. Look for ways to cut costs
For those living paycheck to paycheck, even squirreling away $35 monthly may not be possible. If so, it might be time to look squarely at your monthly budget to see if you make room for a retirement contribution.
While some costs might be fixed, like housing payments or rent, others might be due for a trimming. For example, you might be able to save money on car insurance. While having a car insurance policy is legally required in most states, you might find a cheaper rate by switching to a new company. In fact, in some cases, it might make sense to go with a pay-per-mile company, especially if you don't drive frequently.
You could also save money by earning rewards on your everyday spending, such as with cash back apps or credit cards. If you have the right credit score to apply, certain credit cards, like those that earn a high rate of cash back on groceries, could help you get closer to that $35 monthly contribution through spending you're already doing. Just be careful not to charge more than you can pay back. Interest earned from credit card balances can easily wipe away rewards.
4. Check out the Saver's Credit
The Saver's Credit is a non-refundable tax credit that can help you save up to $1,000 (or $2,000 if married filing jointly) per tax year. To be eligible for the 2023 tax year, your adjusted gross income (AGI) cannot exceed these limits:
- Single: $36,500
- Head of household: $54,750
- Married filing jointly: $73,000
Depending on your AGI, you can claim 50%, 20%, or 10% of your maximum contribution amount. For example, if you're single and your AGI doesn't exceed $21,750 for the 2023 tax year, you could claim 50% of your contributions for a total savings of $1,000. If you managed to contribute $2,000 within the year, you would get the maximum credit. For the specifics on credit rates and thresholds, head over to the IRS website.
Saving for retirement isn't a luxury afforded to only those with some extra cash -- it's a necessity accessible to a majority of Americans if you know where to start. If you've struggled in the past to set aside money for retirement, open one of the best online brokerages and start automating your savings today.
