Yahoo Finance How to Save for Retirement on Less Than $40,000 Per Year
Boost your balance.
Saving for retirement is especially difficult when you earn a small salary. But tucking away even a small amount might qualify you for tax breaks, guarantee you an employer match and get compound interest working on your behalf. Here's how to begin building wealth for retirement when you have a modest income.
Get help from your employer.
A 401(k) match or other type of employer contribution is likely to be the fastest way to build wealth. If your company will provide 50 cents for each dollar you save in the 401(k) plan, that's a 50 percent return on your investment. A dollar-for-dollar 401(k) match will double your money. Find out how much you need to save to get the maximum possible 401(k) match, and then make every effort to deposit that amount in your retirement account.
Qualify for tax breaks.
You can defer paying income tax on the earnings you contribute to a 401(k) or IRA. If you are in the 15 percent tax bracket and deposit $1,000 in an IRA, you will save $150 on your current tax bill. Income tax will not be due on that money until you withdraw it from the account.
Claim the saver's credit.
In addition to the tax deduction for saving in a 401(k) or IRA, low- and moderate-income workers might qualify for the saver's credit. Employees whose adjusted gross income is below $30,750 for individuals and $61,500 for couples in 2016 are eligible to claim the credit, which is worth between 10 and 50 percent of retirement account contributions, up to $2,000 for individuals and $4,000 for couples. For example, a worker who earns $30,000 and manages to put $1,000 in a 401(k) could get a tax credit worth $100.
Consider a Roth account.
A relatively low income usually means you pay a lower income tax rate than people who earn more. If you save in an after-tax Roth IRA or Roth 401(k), you can lock in your current low tax rate and set yourself up for tax-free income in retirement. For example, if you save $1,000 in a Roth IRA and pay 15 percent tax, or $150, on the contribution, after age 59 1/2, you will be able to withdraw that money and the investment earnings without having to pay additional income tax on it.
Check out the myRA.
America's newest retirement account, the myRA, has only one investment option: a U.S. Treasury retirement savings bond that is guaranteed never to decline in value. The account is aimed at those who don't have a 401(k) account at work, but it is open to most workers with earned income. The myRA accepts small contributions and doesn't have any low-balance fees. You can contribute via payroll deduction, direct deposit from a checking or savings account or redirect your tax refund to the account. However, once your balance hits $15,000 or the account turns 30 years old, you will be required to transfer your savings to a Roth IRA.
Watch out for fees.
Excessive retirement account fees will reduce your investment returns. Check out your 401(k) plan's fee disclosure statement to quickly determine how much each fund costs to own, and consider switching funds if you can find a similar alternative that's less expensive. Also, pay attention to sales changes and fees you might incur if you take specific actions. If all of the funds in your 401(k) plan charge fees in excess of 1 percent, it could be worth politely asking for better options.
Avoid early withdrawals.
If you withdraw money from a traditional IRA before age 59 1/2 or from a 401(k) before age 55, you will be charged a 10 percent early withdrawal penalty and regular income tax on the amount withdrawn. A worker in the 15 percent tax bracket who takes a $1,000 IRA withdrawal at age 40 will be charged $250 in taxes and penalties. It's important to establish an emergency fund outside of your retirement accounts so you can avoid retirement account early distribution penalties.
Start with a small amount.
You don't need to save a large amount to get investment returns compounding on your behalf. Beginning by saving $10 or $20 per month can get you into the habit of saving. As you get promotions and raises, you can increase the amount you are tucking away. Or you can sign up for your 401(k) plan's automatic escalation program, which will increase your savings rate over time without any additional action required.
Have the money withheld from your paycheck.
If you know you won't stay motivated to save for retirement every month, have the money withheld from your paycheck before you ever get a chance to spend it. This usually happens automatically when you sign up for a 401(k) plan, but you can also elect to have part of your paychecks directly deposited into an IRA or myRA. Alternatively, you could set up recurring transfers from your checking account to a savings or retirement account. Make saving the default option rather than something you have to remember to do.
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