Yes, I know that not everyone on here is a financial planner or even good with money, yours truly included. But: I’m looking for some advice on how to save more for retirement as a fairly low-income worker (think under 50K per annum). Most of the articles I read on this subject blithely chirp that I should contribute my bonuses! and raises! to retirement and give! up! my! daily! latte! I don’t get bonuses, and although I did get my first raise in 3 years in 2016, it was only 2.5%. I don’t anticipate another raise for a while. (And before you ask, I stay at this specific job since I get free college tuition for my Babybrarians by remaining here). I don’t buy daily lattes out - I’d estimate once per month max, and not every month, so in summary, a lot of the articles on saving more for retirement are NOT very helpful to someone like me.
Here’s what I already do:
Contribute 5% of my pre-tax income to my 401K, which my employer fully matches (anything over 5% my employer does not match).
Contributed $5K for 2016 to a Roth IRA
Am not in debt whatsoever except for my mortgage
Use the library instead of buying books, DVDs, or CDs
Buy my clothing used for the most part
Any other sane suggestions for someone who wants to save more for retirement but doesn’t make a lot in the first place?
Draft a budget. Really sit down and estimate how much money goes towards various necessities (utilities, food, shelter, etc…), and figure out how much is “left over” after paying for all absolute necessities. Put it all down on paper (or computer spreadsheet).
Divide the “left over” money into various categories: savings, “fun money”, stuff that’s not strictly essential but you know you regularly spend anyway (such as home maintenance).
“Save” by reducing your allocation of “fun money” and transferring it to the savings budget line. Be reasonable; $0 in “fun money” is probably not sustainable, long-term.
Review necessities to determine if there’s a way to meet those needs at a lower cost.
** At least once a year, compare your recent spending habits to your proposed budget. **Understand and reconcile and differences (rewrite your budget if your initial estimates were wrong, identify areas where you are not sticking to your plan and modify behavior, etc…)
That said, after doing the exercise, it’s certainly possible that the necessities just wind up eating a good chunk of your budget, and there simply isn’t enough “left over” money to move into savings to begin with. But getting it all down will at least help you to understand where you really stand financially.
What are your major expenses? It looks like you’re on the right track. To know how best to save more money, we need to know what you’re currently spending it on.
A big expense that can often be economized is a personal automobile. Every mile you ride a bike somewhere is a mile that you didn’t have to buy gas, that your car isn’t wearing out, that your auto insurance premium will be reduced, and that makes you healthier.
Thanks for the budgeting advice, Caldazar. I do already track every dollar that comes in and goes out via Mint and my credit union’s money desktop (for good measure).
My main expenses at this point are food, utilities, cell phones for myself and the Babybrarians (can’t get out of my contract for about a year), dining out, gifts (birthday, Father’s Day, Christmas savings, etc.) and insurance. Dining out does include items like a once-a-month breakfast with three different friends, for instance. I split expenses with my husband and our money is separate, so as of now, I’m not paying the mortgage or natural gas.
iamthewalrus(:3=, I do work 9 miles away in an office, so daily commuting by bicycle isn’t feasible, especially with central Illinois’ typical rotten weather. My car is completely paid for, however. I do appreciate the suggestions! Keep ‘em comin’!
It sounds like you’ve got everything under control, and are effectively saving at least 20% of your income. So what’s the worry? Are you getting close to retirement without a lot of savings up to this point?
Tracking expenses is of course good, but setting a budget and then regularly comparing the proposed budget to what actually happened in real life is the key. When you do the annual (or however often) budget review exercise, it forces you to ask question like:
“Why didn’t my spending occur the way I planned? Could I have made different spending decisions and still have had an acceptable lifestyle?”
“Why didn’t I have the savings I thought I did? Oh, it’s because I spent extra on <X>, and that reduced my leftover money.”
The idea is to set goals and start thinking in terms of trade-offs and priorities. A latte isn’t “$4”. It’s “coming up short in my proposed savings goal”, or “reduced ability to have a night out” or some other such thing. It’s assigning meaning to spending beyond the dollar amounts. “That cost me $20” is one thing, but it’s a little abstract and doesn’t necessarily have the impact as “That cost me a trip to the zoo with my kids, that I could no longer afford because I spent on that other thing”. The couple hundred bucks isn’t just a couple hundred bucks, it’s “retiring 6 months earlier than before, after compound growth in sensible investments”. And so on.
The other half of the equation is investing the money wisely, so doing so with a low-cost company like Vanguard is a good idea. (You can end up with a great deal less money at retirement if your money are in a high-cost fund rather than a low-cost one.)
You might want to visit Reddit Personal Finance, where people spend all day, every day asking and answering this question. Even if you don’t participate directly, it’s a great place to get ideas about the best ways to budget and save.
That said, you’re doing pretty much everything that they would recommend. You’re already keeping track of your spending, have an emergency fund, and are putting money in retirement accounts.
Do not underestimate the value of that free college tuition! A good chunk of the posts on Personal Finance are from people struggling with student loan debt.
A Roth IRA is not a tax deduction right now, but the money (including earnings) is not taxed when the money is withdrawn. 401k plans are the opposite - you get a deduction right now, but the money (including earnings) is taxable when it is withdrawn.
As a general rule, the Roth IRA is better if your current income bracket is equal to or lower than your retirement bracket. The 401k is better when the current bracket is higher. Of course, no one knows what retirement brackets will be with any certainty because tax laws change all the time.
Roth IRAs have a hidden advantage when you look at tax rules about Social Security benefits. If you total income is high enough, then SS benefits are taxable at some percentage up to 85%. “High enough” is a pretty low threshold, starting at only 25,000. Because a Roth IRA is not part of income for this purpose, though, you could take some retirement money from 401k, some from Roth, some from SS benefits and end up with no taxable income at all. Whether this strategy pays off should be discussed with a tax pro.
Likewise, knowing whether Roth contributions are the best strategy is difficult to say without seeing a person’s whole financial and tax picture.
You didn’t say how old you were. One thing to do is to set up a spreadsheet which models how much you have, how much you are putting in a year, and various estimates for average growth rates. That should show you a range of money you expect to have available when you do retire. Then you can see how much you can take out, with social security, to retire on. I assume there is a calculator out there somewhere - I’m within weeks but my financial planner did a Monte Carlo analysis of the probability of our having money left at 90, which is more useful.
You’ll find various tools associated with banks that tell you how much you need to retire. They are mostly crap, as you will see if you play with them. If you increase your income and the amount you are putting away, they automatically increase how much you need so the situation just seems worse, not better. These things seem designed to sell retirement plans, not give you an accurate reading of how much you will really need.
How come universities do better 401K matches than industry? My daughter just got a job as a professor, and her 401K plan is better than my Silicon Valley plan, as is yours.
I’m 44 years old, Voyager. I have no idea why the uni 401K matches to 5%, but thank goodness they do. They certainly balance that largesse out in the raise / bonus area IMHO.
manson1972, I chose the Roth IRA because I can pull out my contributions at any time (not the earnings; those stay) in an emergency. Although I only have the mortgage on the house, it needs repairs before it can be sold. Rather than take a home-equity loan if something is REALLY wrong, I can effectively use the Roth IRA as a last-ditch financial resort. It really would be last-ditch, though. It’s my understanding that I couldn’t do that with the 401K - and wouldn’t want to, anyway.
And yes, my total retirement savings amount to only my annual income, whereas I should have about $150K by now according to many estimates. Lots of ground to make up if I can manage it. Any ground made up is better than none, I reckon.
You’ve made a great start, and are ahead of the curve compared to most people. Your head is in the right place.
In addition to the recommendations above, I’d suggest looking at how your assets in the 401k and Roth are allocated. Are they invested in mutual funds? If so, what are the expense ratios? How much are people being paid to make investment decisions on your behalf? Expensive funds can eat a lot into your returns.
Thanks. I’ll check the 401K and see what the investment fees are. I know the Wealthfront Roth IRA manages the first $15K of your money for free, and I have only 5K in there, so no fees on that one. Not sure about the mutual fund angle.
I’m planning to just not retire. My invested retirement account has never made any money and by all accounts SS will be dead and gone by the time I get there. I also find the idea of trying to save up enough to live 1/3 of your life without working to be a bit odd and completely impossible. Perhaps when people didn’t routinely live much past 65 it made sense to retire but now?
I don’t know your specific institution, just came in to say that damn I thought I was actually doing pretty good on librarian pay (if we get raises I’ll make 50k in a few years) and wouldn’t call it “fairly low income”. That’s what they underpay my husband.
Then again somebody took a shit on the escalator awhile back at my workplace, so, you know. Trade offs.
But here’s something - I don’t know your institutional situation, but here in my state I didn’t know until I attended a relatively obscure session at a staff ed day that in addition to State Retirement I can also use a variety of other funds (some of which I knew about, some not) through the state - they’re not matched but they have very low fees attached. If you’re somewhere public, I would suggest you contact somebody in state benefits because once you’ve maxed out what you get matched it can be hard to compare options and that might be a good one for you.
My car is completely paid for, however. I do appreciate the suggestions! Keep ‘em comin’!
