How To Save For Retirement On A Low Income

Saving for Retirement on a Low Income

A low income should not be an excuse for not saving for retirement. The ideal starting point is finding a job where employer contributes to one’s retirement account. The choice of retirement plan, whether 401k, IRA, Roth IRA will determine the tax savings to be made and the extent of benefits to be enjoyed at the end of the day. It is advisable to opt for a plan that offers maximum benefits and minimum costs. Those who want to know how to save for retirement on a low income should get information about assets that should be included in a retirement portfolio.

An individual who feels that social security is not enough for retirement should consider a more proactive approach for saving for retirement. On top of making direct deposit to a plan for retirement, it will also be good to invest in a diverse range of assets that will safeguard one’s future during retirement years. Investments that are good for retirement are those that are less volatile. The last thing desired when it comes to a long-term approach to investing is something that can lose value overnight.

Opt For a Job with a Retirement Plan

One should not ignore a job with low income if it has a provision for employer contributing to one’s retirement. A person should take some time and study whether the retirement package of the job in question is suitable or not. Of particular interest should be to investigate the rate at which the employer will match one’s savings to a retirement plan.

Flexible Retirement Plan Is the Best

A core issue to consider when looking for a retirement account perfect for a person with low income is the flexibility of a plan. One can decide to quit a job at anytime. There is also the prospect of termination of employment contract because of personal issues or the employer going bankrupt. In all these scenarios, the big issue is the fate of retirement savings. A flexible retirement plan can be withdrawn at any moment either because of termination of employment or so that to cater for arising emergencies.

– One can take money out of a Roth account even before reaching retirement. The only requirement is that money should have stayed in the account for at least five years. Money withdrawn is exempt from taxation.

Choose Either Roth IRA, IRA or 401k plan

Generally, the best retirement account for someone who earns a low income is, Roth IRA, 401k or IRA. These three alternatives offer the opportunity to maximize retirement benefits while paying as little tax as possible. They are associated with tax breaks among other benefits.

Take Advantage of Employer’s Matching of Employee Contributions to Maximize Retirement Savings

With a Roth account, an employer can match the savings that an individual contributes to his retirement. Most companies match up to 4 percent. In some scenarios, the percentage is much higher. Therefore, it is essential to contribute as much as possible towards an employer approved retirement plan so that upon matching of amount contributed, one ends up with more retirement savings. If employer matches 4 percent and a person does not contribute at least 4 percent of his income towards retirement, one will essentially be leaving money on the table.

Make Maximum Tax Savings

– Choose Roth IRA or Roth 401 (k)

Retirement savings are subject to either prepaid taxation or taxation after retirement. With Roth arrangements, income tax can be prepaid. This will come in handy for younger working individuals who expect to have higher salaries latter in life. To avoid having to pay higher taxation on retirement contributions because of contributions from higher incomes, one can choose to prepay all the taxes based on currently low income.

-Take advantage of tax breaks

Another way of maximizing tax savings is by taking advantage of tax breaks. A person, who earns low income, will qualify for a number of breaks. Saver’s credit gives singles who earn less than $29,500 in a year a tax break of up to $1,000. Couples earning less than $59,000 combined income in a year can claim saver’s credit of $2,000. The range of this tax break ranges from 10 percent to 50 percent of amount contributed. To be eligible for saver’s credit, one needs to have a Roth account.

Make Direct Deposits to Your Retirement Account

To avoid the temptation of having to spend money meant for retirement, a person should set up a bank standing order that will make retirement contribution deduction from salary before salary hits checking account. With a Roth retirement plan, direct deposit of retirement contributions is the case. Therefore, one will not have an opportunity to squander what should be part of retirement savings.

Other options

When it comes to how to save for retirement on a low income, the options are endless. They range from social security to Roth IRA. Saving for retirement can also involve buying physical gold, investing in electronic traded funds and investing in equity funds. One needs the advice of a real financial professional so that to know the options suitable for personal circumstances.

Actively Managing Retirement Investments

Managing assets and investment accounts for retirement can be a costly affair if professionals do everything. One has to pay investment expenses, fees and charges to companies dealing with management. A person with a low income does not have money to spend. Therefore, he will need a strategy that will keep costs at a bare minimum. A person can decide to manage actively all his accounts and investments. It is possible to learn everything related to investments if one is dedicated towards acquiring financial knowledge.

-Transaction costs can eat up on retirement savings. To keep costs low, one should opt for low-cost index funds. There are many financial instruments with low transaction costs.

Low and moderate-income workers have a number of options when it comes to saving for retirement. Retirement plans that make provisions for employer contributions are the best. With such arrangements, doubling or tripling of retirement contribution is the case. This is because employer matches all contributions. Portfolio of retirement assets can also include physical gold, land and a number of financial instruments.

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