Question:- How To Save For Retirement On A Small Salary?
Answer:- It’s understandable that paychecks, hardly sufficient to take care of regular expenses, make it very difficult to save for your retirement. Yet there are ways and plans helping you to accumulate funds despite small income. Here are some tips on how to save for retirement on a small salary.
Look for a job offering superior benefits on retiring: Before you convey your formal acceptance to a job offer, check the total package on offer. Does it include retirement benefits? Jobs offering such benefits should be preferred. The reason is not difficult to guess. Here’s a simple example. Let’s assume you have two offers at hand from different companies, both paying the same salary of say, $40,000/annum, but only comes with a 401(k) match of up to 3% per annum. On accepting this job your factual earnings become $41,200/year. That helps your savings.
Take benefits of tax exemptions: You would know that even if you make small contributions to your IRA or 401(K) account, your payment towards income tax gets deferred, meaning you are not taxed annually for the amount deposited in these accounts. If you fall in the 15% tax bracket and saves $1,000 in an IRA or 401(k), you’ll save $150 on your next income tax bill. You can contribute to IRA even just before filing your tax return in the month of April, but 401(k) doesn’t offer this facility. This is an important, easy to follow trick when considering how to save for retirement on a small salary.
Get savers’ credit: Those with low to moderate income with contributions to IRA or 401(K) are also entitled for a retirement saver’s tax credit. For the year 2013, workers with salary below $29,500 for singles, $44,250 for heads of household and $59,000 for couples can further claim tax credit of up to $1,000 in case of individuals and double the amount for couples. Your credit rate depends on the amount of your contribution and the amount of salary you draw. You can claim savers’ credit of up to $2,000 towards contribution made to retirement account, with credit varying from 10-50% of the amount of contribution, the maximum credit goes to savers with minimum income. A couple that earns $30,000 and contributes $1,000 to an IRA is entitled to $500 credit.
Think about a Roth IRA: Here is another helpful tip for those wondering how to save for retirement on a small salary. If you happen to be in low tax bracket at present but hope to be falling under a higher bracket during the curse of your career or during retirement, you can benefit substantially by making contributions to Roth IRA or Roth 401(k). This allows you to pay your taxes in advance as per your present low salary. Moreover, no tax is payable on withdrawing funds during retirement, even if you were falling under higher tax bracket. Roth is naturally most helpful if you participate at an early age. You are also allowed to withdraw contributions made by you but not the earnings thereof. Moreover, you are not liable to pay any penalty or tax when needing cash for any emergency. It offers a win-win situation!
Keeping investment costs low: It’s imperative for investors not to pay more fees when choosing investment options than what’s absolutely essential. It’s therefore significant to look for and invest in low-cost index funds. In 2012, the average expense ratio for aggressively managed equity funds was 0.92%, while the same was 0.13% for indexed equity funds, as reported by the Investment Company Institute and Lipper data.
Automate saving for your retirement: The best course for augmenting your savings is to withhold money, you intend saving for retirement, from your paycheck straightway. Then you are not prompted to spend elsewhere. If your employer doesn’t extend means of doing so, you should arrange to transfer definite amount of money from your each paycheck to a savings or investment account. You can give instructions to your bank accordingly. Once you start it, you are most likely to continue with it. Even a small savings of say$10 every week gets accumulated to a substantial amount after a long time.
So, those were some of the important tips telling how to save for retirement on a small salary. You may choose to follow one or more of these practices to build substantial savings for your retirement despite your low salary.