What are some of the best ways to save for retirement while making less than 50k a year?

Question from Christina via Quora.
“What are some of the best ways to save for retirement while making less than 50k a year?”

Christina, if you’ve averaged 50k a year for 35 years of working your social Security benefit will be around $1950 a month at your Full Retirement Age, either 66 or 67 depending how old you are.

So, let’s say you pay $300 a month for health insurance right now.

WHen you hit 65, you’ll probably get a Medigap policy to go along with your Medicare. Medicare Part B, Part D and your Medigap will cost you around…$300 a month.

And you no longer have FICA taxes taken out. So, you save 7.65% right there on taxes, around 4k.

You’re also in the 22% bracket if you’re single too. Meaning you’re losing around 12% or so in income tax to the Feds, another 6k gone.

When you retire those two sources of expenses will be gone, meaning you only need $40k a year to replace $50k a year when you retire.

You probably have work-related expenses you won’t have in retirement too, gassing up the car, lunches, clothes etc. let’s say that’s another $5k.

Thus, in you need $35k to match what you’re making now of $50k. Of the $35k you need, $24k is coming from SOcial Security. So you need $11k a year from your assets.

Take 11,000 and divide it by .05 = 220k you’ll need when you retire. (I use .05 because the standard rule for retirement withdrawal rate is 4% – it’s actually 4.4% but this assumes people spend MORE each year in retirement as they get older. I challenge this assumption and thus am a bit more charitable with a 5% withdrawal rate.)

$220k. Saving $7k a year for 20 years at 7% rate of return will get you $220k when factoring in 2.5% a year inflation.

THis is where people get confused. You need $220k in TODAYS dollars to get you your $11k a year you need. but when factoring in inflation that means you need $360k in 20 years time to get you the equivalent of $11k a year, again in today’s dollars.

You need to then be saving $7k year and earning 7% a year for 20 years to get there.

If you’re making $50k and your company matches 3% for every 3% you contribute that’s $3k a year you’re saving. Can you find another $4k a year? if so you’re good to go.

If not you’re going to have to do some more planning.

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