How To Save More For Retirement If You Don’t Make Much Money
* $180,000 by age 30
* $500,000 by age 40
* $1 million by age 50
* $2 million by age 60
These are the rough estimates for what I think everybody needs to have in their 401Ks or savings accounts to have a reasonable attempt at a comfortable retirement. Of course these figures aren’t set in stone and there are many other things you can do to help your retirement quest. I advise keeping an open mind and using these figures as targets.
If you read the comments from my “401K amount by age” article, you will notice that those in their mid-30s and below tend to disagree with these amounts, while those older generally agree, verify, and accept.
I don’t know why younger folks aren’t willing to follow along. It’s often times just rebel and justify why they aren’t saving. ”Live life!“, they say. True, but who says you can’t live life while saving? The easiest way to learn, is to listen to an older person who has gone through what you will go through. Perhaps it’s immaturity, or the way things are where every generation needs to question the next generation and the status quo.
There’s really no mystery to money. The more you have, the more you can make. It’s all about building the NUT large enough so that when you make a fortuitous 10% return, you’re pulling in an extra $50,000-$100,000 on your $500,000-$1 million portfolio. Get going so you can have more significant returns.
If you aren’t on retirement track based on my 401k age chart and disagree with my figures, just do the math YOURSELF and see whether you’ve saved enough to retire on. I don’t think you’re going to like the results.
There’s one question that kept coming up over and over again, and that’s, “How can I save so much, if I don’t make so much?” It’s a fair question that needs addressing. One commenter mentioned my table must be of “California Currency”, which made me chuckle. The problem of not making enough and therefore not being able to save enough is an honest problem which I’d like to address via a change in mindset and a chart.
HOW TO SAVE FOR RETIREMENT IF YOU DON’T MAKE MUCH
* If you don’t find it painful saving money, you’re not saving enough. If you’re not sweating at the gym and your muscles don’t feel sore the next day, you might as well go eat a double cheeseburger with a milkshake and fries because you’re just wasting your time. The same goes with saving. Since you’re in the lower income bracket, savings is not supposed to be easy. If you’re not feeling the disposable income pinch of putting away, 20%, 25%, 35%, 50% of your income into your 401K, IRA, or savings account, you simply are not saving enough. You need to feel the pain, so you are forced to change your spending habits.
* Recognize that you are not rich. For whatever reason, you do not make a lot of money. It could be by choice (messed up in school, less lucrative field) or misfortune (laid off, accident, starting over). Once you recognize you are of lower income, you’ve got to come to grips with the fact that retirement is not going to be filled with milk and cookies. Think tasty water and crackers instead. You’re going to be working longer and harder than others. You’ve got to save more than your wealthier friends simply because you have less. If you only make $50,000 a year, what on earth are you doing driving a $25,000 car? That’s 50% of your gross income, and around 65% of your net income! If you guys only earn a combined $70,000 a year and have a child, what are you doing living in a 3 bedroom apartment that costs $2,500+ a month? Downsize to a two bedroom apartment and save the difference. A family of four in Tokyo live in 600 square foot, 2 bedroom apartments! Don’t act rich, because you are not.
* Do the math. One commenter asked how he can put away $17,000 a year in his 401K and then another $5,000 in his traditional IRA if he “only” makes $70,000 a year. I told him to do the math. He did the math, and he did it all wrong! This is what he calculated:
70k – 17k (401K) = 53k —> Fine.
53k * 0.4 (taxes)= 31.8k —> 40% tax rate on a $53,000 income?
31.8k * 0.2 (after tax) =25.4k —> What’s this extra 20% tax?
25.4k-5k (Roth) = 20.4k —> Why contribute to a Roth after tax, when you can contribute to a traditional IRA pre-tax?
20.4k/12 = 1.7k per month. —-> Wrong. Should be around $35,500 net = $2,960/month, 74% more than what is stated.
The effective tax rate on a $53,000 income is around 17%. Add on 9% state tax, and at most he’s around 26%. His Roth deduction is fine, if he doesn’t want to contribute $5,000 in a traditional pre-tax. However, I always recommend paying less taxes than more. I am shocked how little people understand what their effective tax rates are, and the difference between pre-tax and post-tax contribution. Do the math people. You have more than you think!
* The new normal is a lower rate of return. Anybody telling you to input more than a 5% constant rate of return on your investments is being too aggressive. The days of 8%+ portfolio returns are gone in an environment of 2% long-term treasury yields. There is an inextricable link to fixed income and equities, and baking in more than a 2.5X return over the risk-free rate is a stretch. We can increase our assumptions once we see an uptick in inflation, corporate earnings, and risk appetite, but not now.
* Realize that making more money is a choice, especially if you live in a developed country. According to one researcher, it only takes around $34,000 to be in the top 1% of world income earners. Meanwhile, $33,000 so happens to be the middle line between the top 50% and bottom 50% of US income earners. You have a choice to work more than 40 hours a week to get ahead. You have a choice to have as many or as little kids as you wish. You have a choice to start a business and make extra income on the side. You have a choice to get in before everyone and leave last, while proposing new profitable ideas for your company. You don’t have to be a top income earner, you just have to make enough to be happy and save. We live in a free country, not North Korea.
* Acccept bigger government. With a ~$2 trillion dollar deficit generated under the Obama administration, the incumbent is your best bet for ensuring that social welfare programs, unemployment insurance, affordable healthcare, and low taxes continue for the middle class. By raising taxes on “the rich”, the current administration is effectively redistributing wealth to lower income individuals through government programs. Republicans are more focused on cutting spending to balance the budget, and not raising taxes given our system already has a progressive structure already. Both systems have its merits and flaws, but if you are making under $200,000 and your retirement accounts are light, from a financial point of view, you’re better off voting for the incumbent. At least you know what you’re getting.
A SYSTEM TO GRADUALLY INCREASE YOUR SAVINGS
Now that you’ve changed your mental outlook, here’s a proposed savings chart I developed to slowly turn the screws so that you get to your retirement goals. Here are some following assumptions:
FINANCIAL SAMURAI RECOMMENDED SAVINGS RATE CHART
| Income Level | Savings % | Pre-Tax Savings | Post-Tax Savings | Fed Tax Rate |
| <$25,000 | 5% | <$1,250 | $0 | 10%-15% |
| $25,000-$35,000 | 10% | $2,500-$3,500 | $0 | 15% |
| $35,00-$45,000 | 15% | $5,250-$6,750 | $0 | 25% |
| $45,000-$65,000 | 20% | $9,000-$13,000 | $0 | 25% |
| $65,000-$85,000 | 25% | $16,250-$17,000 | $750-$5,000 | 25% |
| $85,000-$100,000 | 30% | $17,000 | $8,500-$13,000 | 28% |
| $100,000-$150,000 | 35% | $17,000 | $18,000-$35,500 | 28% |
| $150,000-$200,000 | 35% | $17,000 | $35,500-$53,000 | 28% |
Assumptions for the chart:
* No matter what your income level, you are saving some money. Develop the savings habit early and always.
* As your income level increases, so does your savings percentage rate. Challenge yourself to save more as you make more.
* It’s important to keep your rate of spending slower than your income and savings growth. Don’t let lifestyle inflation derail your plans.
* After you have maxed out your 401K at $17,000, the after-tax savings is simply the difference in your income X savings rate – $17,000. The after-tax savings amount is higher than reality, because you have to pay taxes on the gross income. Hence, multiply your after-tax savings by your Federal + State marginal income tax rate to get your true after-tax savings amount.
* At around $65,000-$85,000, I am assuming you should be able to maximize your 401K contribution, and save more money. In other words, try and target $65,000-$85,000 in annual income as soon as possible.
* I stop at a 35% savings rate to allow one to enjoy their income. Furthermore, at a 35% savings rate at $100,000-$200,000, you will have more than $5,000,000 in retirement savings if you consistently save for 43 years assuming a 5% constant rate of return.
* If you can save more than 35% of your gross income, go for it! After you earn $200,000, you should gradually aim to save 40-50% of your after tax income. We stop at $200,000, because this is the level President Obama deems rich, although plenty of people who make more have difficulty saving a well.
FINANCIAL SAMURAI 401K RETIREMENT SAVINGS GUIDELINE RECAP
| Age | Years Worked | Low End | High End |
| 22 | 0 | $0 | $0 |
| 23 | 1 | $8,000 | $17,000 |
| 24 | 2 | $25,000 | $45,000 |
| 25 | 3 | $42,000 | $70,000 |
| 30 | 8 | $127,000 | $182,000 |
| 35 | 13 | $215,000 | $331,000 |
| 40 | 18 | $300,000 | $521,000 |
| 45 | 23 | $383,000 | $764,000 |
| 50 | 28 | $468,000 | $1,075,000 |
| 55 | 33 | $553,000 | $1,470,000 |
| 60 | 38 | $638,000 | $1,974,000 |
| 65 | 43 | $723,000 | $2,618,000 |
CONCLUSION
The good thing about not making much money, is that you are used to living on not much money, and therefore you don’t need much money to retire on! With the above assumptions and chart, I hope I’ve provided a guide for those who have wondered how they can save so much if they don’t earn much at all. Savings should be an automatic way of life. Always save money before you pay yourself. That way, you will always operate in the confines of your disposable income.
Another good thing about retirement is that when you are retired, you do not have to save for retirement. That 5-35% savings rate I discuss in my charts disappears, making you suddenly that much richer. Meanwhile, you’ve hopefully paid off all your debts, and can live in your home mortgage-free for the rest of your life. But, even if you still have a mortgage, or are renter, with the above system, you should still have enough money to support you until the end.
Please try not to make excuses for why you cannot save even just 5-10% of your pre-tax income in your 401K. I lived in super expensive Manhattan on $40,000 a year and managed to put away $15,000 into my 401K. $40,000 in Manhattan is like $35,000 in San Francisco, and only $25,000 in the MidWest. You just have to make a choice whether you want to build a safety net for your retirement or not. Hopefully you will continue to make more money the longer you work, making saving more money easier and easier. You’ll wake up 10 years from now and amaze at how much money you’ve managed to accumulate.
It’s really up to you. See you at the beach!
Recommendations For Increasing Your Retirement Potential
1) Manage Your Finances In One Place: The best way to increase your wealth is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 28 different accounts (brokerage, multiple banks, 401K, etc) to manage my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing, how my net worth is progressing, and where I’m spending my money. The best feature is their 401K Fee Analyzer which has saved me more than $1,000 dollars in annual fees I had no idea I was paying. There is not better tool I’ve found online that has helped me growth my wealth. It only takes a minute to sign up.
2) Check Your Credit Score: Everybody needs to check their credit score at least once a year given the risk of identity theft as well as the fact that 30% of all credit reports are wrong! For over a year, I thought I had a 790ish credit score until my mortgage refinance bank on day 80 told me they could not proceed due to a $8 late payment by my tenants from two years ago! Check your credit score for free here at GoFreeCredit.com and protect yourself. A credit score is important for potential job opportunities and getting the best rates on mortgage loans, car loans, and credit card loans.
3) Refinance Your Mortgage: If you are a homeowner and you have not refinanced in the past year, I strongly suggest you check online to see what the latest rates are at the very least. The Federal Reserve launched QE3 and have really pushed interest rates down. I always check with Quicken Loans because they are fast, quick, and provide a no obligation real quote based on the input you provide. I recently refinanced to a 5/1 ARM for 2.625% in the Summer of 2012 after just refinancing in the fall of 2011 for 3.125% from 3.625%. Thanks to taking action, I am now saving around $4,000 in interest a year!
Photo: Oahu Sunset, 2012. Sam.
Regards,
Sam
It might be better if you are more careful with you recommendation of contributing to an traditional 401K vs Roth401K or just Roth because some, for example people in the military, have tax exempt income which leaves the effective tax rate lower than when they will retire. In this case a Roth is better since the Taxes then will probably be more, especially if you have a big nest egg to draw from when you retire. Our income for example is about 120K, due to some income not being taxable our actual “taxable” income is 86K and after all the detuctions our tax rate is only 9%. Do you think we will be at a 9% tax rate in 35years when we retire? We are mid 20′s with one spouse in military and the other having professional career.
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Financial Samurai Reply:
October 10th, 2012 at 1:27 pm
Are you talking federal, state, or combined? Sure, why not? Move to Hawaii and your pension (giving you are talking military) has no state tax at all. Several states are like this.
Do what you feel is right. Saving is better than no saving. I cannot know everybody’s individual case, and whether they have a sweatheart deal from the gov’t, have carried interest income, an inheritance, a pension, etc.
The point is to save.
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i agree with the story but the obama part i heard enough from alot of these ignorant ass people. i see yall not talking about bush and how he didnt know what the hell he was doing while in office.
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For all the rules and advice, I think it alls comes back to determining what’s important to you. Like someone said on another post, Gen Y we’re happy with internet connection, our iPhones, and then in my case a Starbucks coffee (killing someone due to caffeine withdrawal will def put a hamper on future earnings and retirement savings).
The H and I make more than this guideline, $170K/ year pre-tax. But with our budget we will save a little less than $50K next year between 401K (not including employer match), IRAs, savings, and other investments. I’d like to save more, but one of those judgement calls of things thats important to us is being active. And our food bills run us like another mortgage at ~$900/ month. Could we cut that down some and invest it, yes. Would we be happy if we did, no. So we make sacrifices in other areas. Like not buying a lot of expensive clothes, and both driving cars that are 7 years old and each have 100K+ miles on them.
I think savings should “hurt”… but maybe not on the stuff that is integral to who you are and what TRULLY makes you happy… Let it hurt on the other stuff.
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In my humble opinion the RothIRA is the best saving vehicle there is….except the 5k/yr limit.
5k/yr. after tax money
30 yrs. earning FS’s est. of 8%/yr.
Indiv. investment of 150k over 30 years
Your TAX FREE money at retirement age of $561,461
If your finances for investing for your future are tight, I think this is a good plan….
First, if your company matches a 401k contribution and pays for the management fees, do the max employer match contribution first…..that’s an instant 100% return on your investment.
Then max out your own and your wife’s(if married) Roth before investing any more to your 401k.
IMHO it’s also a matter of government stability. The Roth IRA tax advantage isn’t a “right”, it can disappear at any time.
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Ilma Reply:
December 12th, 2012 at 8:20 pm
I make less than 15,000yr and pay rent and other bills. Now, I am over 50 and work less than 40 hours, and don`t have any savings.
I would Like to know if it is not too late for some retirement plans.
Roth? or 401k ?
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I am new to the corporate world having just graduated in May, but was lucky enough to find a decent paying job that I started in August at 42.5k a year. My question to you is that there is no way I could max out my 401k each year, not saying that I’m not saving I put 10% with a 7% match, but I am saving for a home so need to invest my savings in something a little more liquid than a 401k. That being said I do still spend a lot of money on having fun, a lot to due with the fact that most of my friends either dropped out of college or are just working part time jobs. I will say that my plan is to increase my 401k contribution everytime I get a raise, which if histroy holds true should be around 3% per year depending on economic conditions. I also am eligable for a 5% bonus every April depending on how the company is doing, which currently would be just over 2k. I plan to add 2k to that each year and load it into a Roth. Given my circumstances, would you consider me on track (also no debt)
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Financial Samurai Reply:
January 2nd, 2013 at 2:34 pm
Matt, too early to say if you are on track if you just graduated in May 2012.
At least you’re thinking about your savings and retirement, which is a good first step!
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I have to say I have to agree with the recommended savings percentages for those on lower than average incomes. I live in the high cost San Francisco Bay Area (not as expensive as SF proper, but still one of the higher cost parts of the already high cost Bay Area). I made 45.5K in 2012. I saved $12,725 in my 401K plan last year…so my income was on the low end of the 45K-65K range yet my savings was on the high end of the range for my income level.
It can be done if you:
–Don’t have kids, or at least don’t have them out of wedlock. That’s financial suicide.
–Don’t drive new cars. (Mine is 16 years old and runs fine).
–Live in a studio or shared housing instead of a 1BR apartment.
–Keep the food budget resaonable. Stock up on things on sale. I still eat out at moderately priced places 2X per week (usually for lunch, which is cheaper).
–Skip the Cable TV. Most of what’s on is junk anyway…and almost all of it has too many commercials. You can get DVDs from the library, watch stuff on YouTube (My 42″ TV screen is hooked up to my PC. I have wireless mouse & keyboard), or get NetFllix.
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