Low paychecks do not mean that retirement planning is impossible. While some non-profit organizations offer retirement plans to employees, most other organizations expect employees to chart their own course.
So, how do you save up for retirement if you’re in a low-income career path?
The answer lies in effective retirement planning solutions available for individuals in the low income bracket. You need to look beyond Social Security, since the benefits are typically too low for a comfortable retirement.
Tips for Low-Income Retirement Planning
If you fall in the low income bracket, remember that being an early bird offers a huge advantage. The important thing to remember is taking advantage of compounding interest with the time factor, since even small sums of money can grow into large nest eggs if they earn interest over a longer period of time.
Here are some basic tips to keep in mind:
Claiming Tax Breaks for Retirement Planning
Remember to contribute to your retirement plan at the beginning of the year to claim a full year of compounded growth. Over the years to come, even small chunks of money would have grown significantly, along with tax-deferred benefits.
With most retirement savings accounts, withdrawals are not taxed if you make them after you retire. It’s also a good idea to total up your estate and check whether it is taxable, so you can use financial strategies to reduce the tax burden for your heirs.
Consider a ROTH Account
The best option for low-income earners is the Roth IRA account, funded with after-tax money. You can make contributions throughout the year, up to an annual maximum limit ($5,000 if you’re under 49), and invest in options like cash, bonds and stocks, or even index funds that allow you to diversify your portfolio.
The income you earn from these investments stays in the account and when you reach the age of 59½, you can withdraw it without incurring income tax or penalties. While you can withdraw money from a Roth IRA before maturity, there’s taxes and a penalty involved, and you cannot replace funds once you’ve withdrawn them.
Look for Jobs with Retirement Benefits
When you’re looking for employment or planning to switch employers, always check for the retirement planning benefits they offer. If you’re already employed, check with your HR department about whether your company offers the option for matching contributions that you make in a retirement planning account.
Life Insurance Makes All the Difference
It would not be an exaggeration to say that insurance (life, health or disability) is the elixir of financial planning, especially if your means are limited. Life insurance is crucial during your work life, to cover expenses for your family in case of an eventuality like death or disability.
The most viable option would be a term insurance plan that is customized to your needs. The premium need not take a toll on your resources, and if you buy when you’re young and healthy, it could be under $20 a month!
Keep the Fees in Check
As far as possible, plan and manage your investments and savings on your own, to avoid paying expensive fees, commissions and brokerage services. Most investments fees do not translate into significantly higher returns, and the amount you may spend there can be more useful being saved for your retirement nest egg. At the same time, get a professional’s opinion before choosing insurance and other critical investments.
Squirrel Away the Raises and Windfalls
Splurge the raise that you just received? No! Don’t forget that in the evening of your life, you may not be strong enough to work the way you do today. Do not give into temptation in the name of spontaneity – toil like the ant in the summer of your life, lest you end up in despair like the grasshopper once the winter sets in.
While it may seems an arduous task to save for retirement with a low income, it’s not impossible if you stick it out and explore all the solutions available. If you want to know which financial vehicles make the most sense based on your income and needs, get in touch with LifeCentra for a consultation today!