How to Plan for Retirement When You Don't Make Much Money

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Getty ImagesThese tips can help to grow your nest egg -- even with a low income.
By Emily Brandon

Saving for retirement is especially difficult when you are earning a small salary. However, there are a variety of ways you can begin building a nest egg, even if you are receiving small paychecks. Here are some strategies to invest for retirement with a low income:

Claim tax breaks for retirement saving. Saving for retirement in a 401(k) or individual retirement account allows you to reduce your tax bill. A worker in the 15 percent tax bracket who contributes $500 to a traditional IRA will save $75 in federal income taxes. The same contribution made by someone in the 25 percent tax bracket would reduce the tax bill by $125. IRA contributions can be made up until your tax filing deadline, so it's worth plugging an IRA contribution into your tax-planning software to see how much your tax bill will decline if you can come up with the cash for an IRA deposit.

In addition to this tax deduction, workers with incomes of up to $30,000 for individuals, $45,000 for heads of household and $60,000 for couples in 2014 can claim the saver's credit. The credit is worth 50 percent, 20 percent or 10 percent of your retirement account contributions, up to $2,000 for individuals and $4,000 for couples, with the largest credit going to workers with the lowest adjusted gross incomes.

Consider a Roth account. After-tax Roth accounts don't give you a tax deduction in the year you make the contribution, but you will not have to pay taxes on withdrawals from the account in retirement. Roth IRAs and 401(k)s can be especially beneficial to people with low earnings because they pay a low tax rate on their contributions. For example, a worker in the 15 percent tax bracket who expects to get a higher-paying job that results in him jumping into the 25 percent tax bracket later in his career and in retirement would be better off making Roth contributions and paying taxes on that income now while his tax rate is low. That way, he will pay the 15 percent tax rate on the money now instead of the 25 percent tax rate when he takes the money out in retirement. "The benefits of a Roth are great in the long term," says Teri Alexander, a certified financial planner and president of Alexander Financial Planning in Columbus, Ohio. "As long as the money is in a Roth for five years or until you turn 59½, whichever is greater, you can take money out after that point totally tax-free, and once you turn 70½, you are not required to take that money out at that point in time as you are with an employer plan or regular IRA." Additionally, Roth contributions make you eligible for the saver's tax credit.

Seek a job with retirement benefits. The fastest way to grow your nest egg is to find an employer that will make contributions to your retirement account. A 401(k) match and other types of employer retirement account contributions are part of the compensation package that should be considered when comparing job offers. If you do get a 401(k) match, make sure you contribute enough to get as much of it as you can. "If your company matches up to 4 percent and you are not putting in that 4 percent, you are essentially turning down extra money," says Steven Bové, a certified financial planner and president of Lebrigh Life Planners in Oldsmar, Florida.

Make saving automatic. A major perk of 401(k) plans is having the money withheld from your paycheck before it ever hits your checking account and is available for spending. If you don't have a 401(k) at work, you can create this effect by having part of every paycheck directly deposited into an IRA. "If you take $50 or $100 out of each paycheck and that starts happening automatically, it's not something you have to think about every time you get each paycheck," Alexander says. "When it's something that happens automatically, you don't miss it."

Watch out for fees. The fees you pay to invest result in lower returns and slower investment growth. Take the time to shop around for investments with reasonable or low fees. "Fees matter because any fee that you pay is coming out of the return that you are getting," says Gwen Gepfert, a certified financial planner and principal of Oaktree Financial Planning in Basking Ridge, New Jersey. "Individuals are best served having a passive investment approach and buying very low-cost index funds."

Save raises and windfalls. Aim to save at least a portion of every raise, bonus, tax refund or other cash windfall. "If you happen to be lucky and get a bonus, take 10 percent of your bonus and do something fun with it, but take 90 percent of your bonus and save it," Gepfert says. "The same thing goes with a tax refund. Don't use that as a reason to spend money just because you got a large check."

Emily Brandon is the senior editor for Retirement at U.S. News. You can contact her on Twitter @aiming2retire, circle her on Google Plus or email her at

10 Financial Rules You Should Break
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How to Plan for Retirement When You Don't Make Much Money

This is the granddaddy of them all. Start to type "emergency" into Google (GOOG), and the first suggestion is "emergency fund." The rule is to make sure you have six month's of living expenses tucked away in cash in case you losefyour job or suffer a financial setback. Of course it's important to have a financial safety net, but when you earn virtually nothing on your cash, this rule can cost you. For example, if six months of living expenses for you is $25,000, you'd be sacrificing close to $1,000 of income a year by keeping this money in a checking or money market account.

For years, I've broken the mold on this financial rule by telling clients they shouldn't have their emergency fund in cash. Instead, choose a short-term bond fund that pays 3 percent or higher for your safety net. If you need the money quickly, you can easily sell the fund and get access to the cash. If you don't need the cash –- and these emergency fund accounts are rarely used –- you can still make money on the assets.

Not so fast. There are many good reasons to contribute to a 401(k), such as tax savings, tax-deferred growth and a possible employer match, but there are also good reasons not to contribute as well. Don't blindly dump money into your 401(k) if you don't have an emergency reserve of some sort and there is a chance you will be laid off. It is taking longer for most to find a job, so if you think you may be out of work, make sure you have the resources to pay rent and buy food until you land a new job. 

​Also, if your employer doesn't provide a match and you are in a low-income tax bracket, it may make more sense to pay the tax now (since you are in a low tax bracket) and invest in a Roth individual retirement account instead. Use this 401(k) vs. Roth IRA calculator to crunch the numbers.

You cannot cut your way to wealth. Too many people and financial advisers focus on trimming expenses when they should be focused on the other half of the equation -- income. I'm a proponent for living within one's means, but too often that creates an artificial barrier or ceiling. "This is what I make, so I have to cut back to save more," is often the thought process. Rather than living within your mean, work on increasing your means.

There are many ways you can make more money, including asking for a raise, boosting your skills –- your human capital –- and getting a promotion, starting a side project in the after-hours or going back to school and starting a new career. What you make today is not necessarily what you can make tomorrow. Cut unnecessary expenses and then use your energy to increase your income.

You should only save for your children's education if you can afford it. That means when you're on track to having enough assets for your retirement. Assuming you have the retirement assets and now want to save for college, most advisers will recommend a 529 college savings account.

Not so fast. These 529 accounts have some real advantages, such as tax-free growth of contributions if they are used for approved higher education expenses. This tax-free growth is a big benefit. However, if you withdraw money from this account and do not use it for approved higher education expenses, the gains will be subject to ordinary income tax and a 10 percent penalty.

The big risk is if you fully fund your child's college education but he or she decides to not go to college, drops out, finishes early or goes to a less expensive school. You have the ability change the beneficiary to another qualifying family member without penalty, but if you have just one child, there may not be anyone you can transfer the funds to. You would then have to liquidate the account and pay the tax and penalty. If you are undeterred and still want to pay for your child's college education, start with a small contribution into the 529 and fund up to a maximum of 60 percent of the cost in case one of the above scenarios occur.

The average age of cars on U.S. roads is 11.4 years. So if you're average, then it may make sense for you to buy a car -– especially a car a year or two old –- instead of leasing. However, if you do not intend on driving the same car for over a decade, a lease may be a much better option. A new study by found it was better to lease than buy based on its criteria. And under certain circumstances, you may be afforded a larger business deduction with a lease compared to a purchase.

The certified financial planner designation is the gold standard when it comes to financial planning. I wouldn't think of hiring a financial planner if they weren't a CFP practitioner. However, just because you are working with a CFP doesn't mean you shouldn't research your adviser, his or her areas of expertise and how he or she charges. The CFP tells you he or she has advanced training in areas related to tax, investing and retirement planning; has passed a comprehensive and difficult exam; and has agreed to adhere to a high code of ethics.

The onus is on you to know what you need and to make sure your CFP financial planner can deliver. Don't get lulled into thinking that just because he or she have three letters after his or her name that he or she has been screened. Ask tough questions before you trust your money to anyone -– even a CFP.

Most financial pundits will advise taxpayers to have just enough taken out of their paycheck so when April 15 comes around, they will neither owe money nor receive a refund. The rationale is if you get a refund from the Internal Revenue Service, it means you paid too much in over the year -- and the government has had use of your money without paying you any interest. Keep the money and invest it yourself is the theory.

'Again, that's the theory, but reality is much different. It all comes down to psychology. I look at paying a bit more to the IRS as a forced and automatic savings account. Sure you won't earn interest, but human nature tells us you probably won't save the money anyway. There is a greater chance you will squander $100 a paycheck then if you receive a $2,400 check from the IRS. One approach takes a plan and discipline each month to save and invest while the other doesn't. A check from the IRS isn't an interest-free loan; it is an automatic savings plan.

Nobody wants to endure an IRS audit, but too often I see honest and ethical taxpayers avoid claiming certain deductions or taking certain positions that are completely legitimate because they fear it will increase their chances of an audit. First, your chances of being audited are small –- about 1 in 104 chance. If your return doesn't include income from a business, rental real estate or farm, or employee business expense deductions, your chances are even smaller -– 1 in 250. Second, if you and your tax preparer are not crossing the line, you have little to worry about. In fact, thousands of taxpayers get a check from the IRS at the end of the audit. Don't let a small chance of an audit keep you from taking advantage of every tax strategy for which you qualify.

Do what you love, and you'll never have to work a day in your life, or so the saying goes. It sounds good and feels good, but it's not necessarily true. Sometimes –- often, actually –- doing what you love can be a great hobby but not a good career. There are a lot of things I enjoy that I'll never make a dime doing. A better approach is to find something you enjoy, are good at and that you can get paid to That is the financial trinity you should aspire to find because it ties your interests with your skills with the marketplace

Follow this rule, and I'll send you straight to detention. We know college costs are soaring, and we don't want to bury our kids in college debt, so most parents prioritize college saving over retirement saving. Big mistake. If worse comes to worst, Junior can get a loan, work while in school or go to a less expensive school. Basically, Junior has decent options, and you have tough choices. 

​If you haven't saved enough for retirement, you are stuck. There's very little you can do other than slash your expenses, work longer or both. Save for your own retirement first. That's the financial rule you should follow. If you have amassed so much wealth when your children head off to college that you can afford to help them, go for it. If you haven't, you'd be doing your kids a disservice by jeopardizing your own retirement by paying for their tuition.

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