Best way for a 30 year-old making $22,000/year to save for old age?
July 13, 2019 2:27 PM Subscribe
What is the best way for a 30 year-old person making $22,000/year and living paycheck-to-paycheck in the US to save even a small amount for retirement?
They would be able to put about $30-40/month into retirement savings. They do not have any kind of pension via work or otherwise. They're aware that they won't be able to save enough to finance a full retirement, but they want to have at least something rather than nothing. They don't have debt or savings--their full paycheck is currently devoted to necessary expenses and it would be noticeable to put away that $30-40 per month, but not impossible. I know the advice might be to create an emergency fund first, but due to living paycheck-to-paycheck the expenses always seem to expand to eat up any small amount in savings. They're aware they should have an emergency fund but feel that if they focus on creating that, they will never put anything away for old age. They want to focus on retirement savings first.
Should they open an IRA? If so, there is the key question of traditional or Roth? Their tax rate is low now on their $22,000 income, and they will probably stay in a field where they will be able to move up to an income of about $40,000-$50,000 (in today's dollars) by age 60 or so.
Should they do something else other than an IRA? If so, what?
Are there any pitfalls they should be thinking about, such as: if they have their own IRA, it might detract from their access to Social Security? Etc?
They would be able to put about $30-40/month into retirement savings. They do not have any kind of pension via work or otherwise. They're aware that they won't be able to save enough to finance a full retirement, but they want to have at least something rather than nothing. They don't have debt or savings--their full paycheck is currently devoted to necessary expenses and it would be noticeable to put away that $30-40 per month, but not impossible. I know the advice might be to create an emergency fund first, but due to living paycheck-to-paycheck the expenses always seem to expand to eat up any small amount in savings. They're aware they should have an emergency fund but feel that if they focus on creating that, they will never put anything away for old age. They want to focus on retirement savings first.
Should they open an IRA? If so, there is the key question of traditional or Roth? Their tax rate is low now on their $22,000 income, and they will probably stay in a field where they will be able to move up to an income of about $40,000-$50,000 (in today's dollars) by age 60 or so.
Should they do something else other than an IRA? If so, what?
Are there any pitfalls they should be thinking about, such as: if they have their own IRA, it might detract from their access to Social Security? Etc?
An IRA allows taxes on savings to be postponed until the owner withdraws them with the expectation that they will have a lower income at that point and so the tax rate will be lower. It doesn't seem like someone making such a low income now would get any benefit from this. And access to social security is not affected by other assets.
posted by Botanizer at 3:05 PM on July 13, 2019 [2 favorites]
posted by Botanizer at 3:05 PM on July 13, 2019 [2 favorites]
Does this person have access to tax prep help? That's a low salary and they should make sure they're getting their maximum credits/refund. Many cities have nonprofits that provide tax assistance between January and April, and many of those will also help you set up savings plans to deal with your refund. They would be very well equipped to help with a Roth, etc.
In fact, this person (and perhaps you can help them) should look for nonprofits in their state, county or town which provide financial advice to low income people. I did a bunch of training with one and was surprised by the number of tax credits and financial options there were that I'd never heard of.
You can call now even though it's not tax season - these places are staffed year round and do a tax-time ramp up.
posted by Frowner at 3:17 PM on July 13, 2019 [9 favorites]
In fact, this person (and perhaps you can help them) should look for nonprofits in their state, county or town which provide financial advice to low income people. I did a bunch of training with one and was surprised by the number of tax credits and financial options there were that I'd never heard of.
You can call now even though it's not tax season - these places are staffed year round and do a tax-time ramp up.
posted by Frowner at 3:17 PM on July 13, 2019 [9 favorites]
If they are low income and don't have an emergency fund, I would make sure they have plans to pay for things like an unexpected car problem or a sudden apartment move before helping them setup an IRA. There can be early withdrawal penalties for IRA accounts if withdrawals are made before the person turns 59.5 years old (there are some exceptions). I would just recommend that they make automatic payments every paycheck to a separate savings account.
posted by mundo at 3:38 PM on July 13, 2019 [7 favorites]
posted by mundo at 3:38 PM on July 13, 2019 [7 favorites]
I reckon the most important factors for building long-term retirement savings are (i) how much you can save per year, (ii) how many years you can keep producing savings, and then (iii) what asset classes you invest the savings in, then maybe (iv) structuring things to reduce tax. The first factors are much more important than the latter ones.
The primary problem is simply not saving enough per year. Focus on taking actions to increase savings. Increase income or reduce expenses. Ideally both. This advice might come across as a bit glib, and may be very challenging to carry out depending upon personal circumstances.
Example of how to increase income: find a new job that pays more money. This might be easy to do if it turns out you are underpaid, and there's enough other nearby opportunities for work. If you are not underpaid, or there are not many other opportunities for work you can do, this is harder.
Example of how to reduce expenses: reduce housing costs. If e.g. you rent a 1 bed apartment of your own, maybe you can save a lot of money on housing by moving into a share house with a few flatmates.
Both the above example actions rely on having the time and energy and money to search for these kinds of opportunities until you find a good one that you can take advantage of. If you are living paycheck to paycheck it might be very challenging to take a day off work & pay for transport to a nearby town to interview, or to pay for a removal truck and pay for a bond and perhaps a few weeks of overlapping rent when moving from more expensive housing to cheaper housing, as the up front costs of moving might take 6 or 12 months before hitting break-even point.
I'd suggest that focusing on retirement is not currently a good long-term goal. It might be more actionable to have a medium term goal of "regularly save at least $10,000 / year":
1. (immediate term) think very hard about actions that can reduce expenses, and can be kept up for a few months or a year, to increase savings
2. build up an emergency fund large enough to cover living expenses for 3 -- 6 months
3. once emergency fund is large enough so that it doesn't seem scary to e.g. take a day off work to go interview for a job that pays more money, or move house to somewhere cheaper, start trying to spend lots of energy and a bit of money on making changes that will increase the amount of money you can save. The biggest impact is most likely simply landing a new job that pays more money. Other changes like moving into cheaper housing or e.g. spending $200 on a bicycle to avoid paying $1000 / year on public transport
4. keep on looking for opportunities to make similar changes to keep increasing your income or reducing expenses until you are comfortably hitting the annual savings goal.
5. Start thinking about retirement planning again
I appreciate that it is much easier to give this advice from an armchair than to follow it, and it is much easier to follow this advice if you are already in a situation with time and money to spare. The first steps are the hardest.
posted by are-coral-made at 3:55 PM on July 13, 2019 [3 favorites]
The primary problem is simply not saving enough per year. Focus on taking actions to increase savings. Increase income or reduce expenses. Ideally both. This advice might come across as a bit glib, and may be very challenging to carry out depending upon personal circumstances.
Example of how to increase income: find a new job that pays more money. This might be easy to do if it turns out you are underpaid, and there's enough other nearby opportunities for work. If you are not underpaid, or there are not many other opportunities for work you can do, this is harder.
Example of how to reduce expenses: reduce housing costs. If e.g. you rent a 1 bed apartment of your own, maybe you can save a lot of money on housing by moving into a share house with a few flatmates.
Both the above example actions rely on having the time and energy and money to search for these kinds of opportunities until you find a good one that you can take advantage of. If you are living paycheck to paycheck it might be very challenging to take a day off work & pay for transport to a nearby town to interview, or to pay for a removal truck and pay for a bond and perhaps a few weeks of overlapping rent when moving from more expensive housing to cheaper housing, as the up front costs of moving might take 6 or 12 months before hitting break-even point.
I'd suggest that focusing on retirement is not currently a good long-term goal. It might be more actionable to have a medium term goal of "regularly save at least $10,000 / year":
1. (immediate term) think very hard about actions that can reduce expenses, and can be kept up for a few months or a year, to increase savings
2. build up an emergency fund large enough to cover living expenses for 3 -- 6 months
3. once emergency fund is large enough so that it doesn't seem scary to e.g. take a day off work to go interview for a job that pays more money, or move house to somewhere cheaper, start trying to spend lots of energy and a bit of money on making changes that will increase the amount of money you can save. The biggest impact is most likely simply landing a new job that pays more money. Other changes like moving into cheaper housing or e.g. spending $200 on a bicycle to avoid paying $1000 / year on public transport
4. keep on looking for opportunities to make similar changes to keep increasing your income or reducing expenses until you are comfortably hitting the annual savings goal.
5. Start thinking about retirement planning again
I appreciate that it is much easier to give this advice from an armchair than to follow it, and it is much easier to follow this advice if you are already in a situation with time and money to spare. The first steps are the hardest.
posted by are-coral-made at 3:55 PM on July 13, 2019 [3 favorites]
Best answer: I think the ideal advice is useless if it is ignored. Your friend is clear that saving for retirement isa goal that they can get behind and put into action while saving for an emergency fund is not going to happen. I would respect their self-knowledge. Maybe once they get in the habit of savings they will be ready to adjust the plan.
In the meanwhile, I think a Roth IRA would work well. They invest what they can for now. There is no tax deduction but at their income level that is not a big problem. When they retire, they can withdraw the money, including the earnings, tax free. Even if they save for a while and then stop making contributions, what they put in will continue to grow, free of current and future taxes. And if they hit a true emergency and they need to take the money out, they have to pay taxes on the previously untaxed earning and they may have to pay a 10% penalty. There are several ways to avoid the penalty (for example if the money is for a huge medical bill or downpayment on a house) but that penalty also becomes an incentive not to dip into the money unless it is really, really needed.
As for how to do it, I usually recommend Vanguard, they are very low cost and they offer Target Retirement funds that offer a reasonable investment option with minimal decision making. The annual fee is waived if you are willing to do everything on line. I think there is also a automatic investment feature that would let your friend follow up on their commitment by having the money automatically transferred every month. The only down side is that they would need to save up $1000 to make the initial investment.
posted by metahawk at 4:17 PM on July 13, 2019 [6 favorites]
In the meanwhile, I think a Roth IRA would work well. They invest what they can for now. There is no tax deduction but at their income level that is not a big problem. When they retire, they can withdraw the money, including the earnings, tax free. Even if they save for a while and then stop making contributions, what they put in will continue to grow, free of current and future taxes. And if they hit a true emergency and they need to take the money out, they have to pay taxes on the previously untaxed earning and they may have to pay a 10% penalty. There are several ways to avoid the penalty (for example if the money is for a huge medical bill or downpayment on a house) but that penalty also becomes an incentive not to dip into the money unless it is really, really needed.
As for how to do it, I usually recommend Vanguard, they are very low cost and they offer Target Retirement funds that offer a reasonable investment option with minimal decision making. The annual fee is waived if you are willing to do everything on line. I think there is also a automatic investment feature that would let your friend follow up on their commitment by having the money automatically transferred every month. The only down side is that they would need to save up $1000 to make the initial investment.
posted by metahawk at 4:17 PM on July 13, 2019 [6 favorites]
And if they hit a true emergency and they need to take the money out, they have to pay taxes on the previously untaxed earning and they may have to pay a 10% penalty.
To clarify, with a Roth IRA, you may always remove your contributions without penalty, it's only the earnings that would have a penalty, which is why they make an excellent combination emergency fund / retirement fund for people in this situation. It does carry the risk of the original investment losing value in the short term, so it should not be the primary emergency fund.
And yes, Savers Credit.
posted by Candleman at 4:25 PM on July 13, 2019 [4 favorites]
To clarify, with a Roth IRA, you may always remove your contributions without penalty, it's only the earnings that would have a penalty, which is why they make an excellent combination emergency fund / retirement fund for people in this situation. It does carry the risk of the original investment losing value in the short term, so it should not be the primary emergency fund.
And yes, Savers Credit.
posted by Candleman at 4:25 PM on July 13, 2019 [4 favorites]
The best way is to earn more money, one way or another. That could mean an extra part-time job. Or better yet would be a better-paying full-time job.
posted by NotLost at 6:32 PM on July 13, 2019 [2 favorites]
posted by NotLost at 6:32 PM on July 13, 2019 [2 favorites]
A hack to suggest to them:
You clearly have drive and discipline for this, which is great. Fine-slice to squirrel away savings as best you can - however puny - in whatever vehicle you settle on. And stick to that plan with iron commitment. But then do something that would be stressful torture for someone less driven: very gradually keep increasing the size of that fine slice (i.e. the monthly hold-back into savings).
Since you presumably won't be able to arrange commensurate raises at work, you'll create modest pressure to find just a little more money. And necessity mothers invention.
Under such micro-pressure, you will find ways to cut expenses that otherwise would be missed. And you will be more resourceful and energetic in finding secondary income sources. But keep it playful, don't turn it into a neurosis! Pretend you're playing a Sim game.
If you doubt the effectiveness of gently sustained pressure, have a look at the Grand Canyon, etched not by a roaring torrent but the unceasing meager drippings of some crappy little river.
posted by Quisp Lover at 7:51 PM on July 13, 2019
You clearly have drive and discipline for this, which is great. Fine-slice to squirrel away savings as best you can - however puny - in whatever vehicle you settle on. And stick to that plan with iron commitment. But then do something that would be stressful torture for someone less driven: very gradually keep increasing the size of that fine slice (i.e. the monthly hold-back into savings).
Since you presumably won't be able to arrange commensurate raises at work, you'll create modest pressure to find just a little more money. And necessity mothers invention.
Under such micro-pressure, you will find ways to cut expenses that otherwise would be missed. And you will be more resourceful and energetic in finding secondary income sources. But keep it playful, don't turn it into a neurosis! Pretend you're playing a Sim game.
If you doubt the effectiveness of gently sustained pressure, have a look at the Grand Canyon, etched not by a roaring torrent but the unceasing meager drippings of some crappy little river.
posted by Quisp Lover at 7:51 PM on July 13, 2019
I-bonds aren't a get rich investment; they pay current interest rate and a few tenths %; but they can also be considered an emergency fund at the same time. YMMV and they are an online US Gov't item.
Vanguard, Fidelity; etc; they do have some neat stuff; but yeah; they can change things in a lot of those where if you don't contribute enough; you get a fee. Or discontinue a program, and a fee. Withdrawal early for whatever reason? Yeah, another fee. Lots and lots of pages and pages of stuff for most of those programs; and maybe that isn't what you are really looking to do right now anyway.
Dave Ramsey has done me well, started near 20 years ago. Not quite oriented around young and beginning types of pay scales much too much anymore; but the whole "avoid debt" mantra in itself allows for savings to occur. He has a lot of Youtube and other free material out there.
At a beginning to invest point; I would't worry too much about IRA, taxes, or much of that. An extra thousand a year saved; yeah, taxes probably aren't your real concern at this point in your saving and investing adventure.
posted by Afghan Stan at 8:57 PM on July 13, 2019
Vanguard, Fidelity; etc; they do have some neat stuff; but yeah; they can change things in a lot of those where if you don't contribute enough; you get a fee. Or discontinue a program, and a fee. Withdrawal early for whatever reason? Yeah, another fee. Lots and lots of pages and pages of stuff for most of those programs; and maybe that isn't what you are really looking to do right now anyway.
Dave Ramsey has done me well, started near 20 years ago. Not quite oriented around young and beginning types of pay scales much too much anymore; but the whole "avoid debt" mantra in itself allows for savings to occur. He has a lot of Youtube and other free material out there.
At a beginning to invest point; I would't worry too much about IRA, taxes, or much of that. An extra thousand a year saved; yeah, taxes probably aren't your real concern at this point in your saving and investing adventure.
posted by Afghan Stan at 8:57 PM on July 13, 2019
I don't want to sound depressing, but the first thing that needs to happen is to figure out if it's realistic to save at all. Poverty is a real thing. And saving through substandard housing, cutting on food or health care costs does carry long term risks including early death. So maybe they can save a little bit, but everybody has to eat he has to live somewhere and they can't ignore health issues and that likely means spending what is available.
Honestly, I'd focus on the effort to increase income while stabilizing expenses. That's likely to lead to more productive savings over the long term and increase the probability of retirement funds at all.
If they want to save there are many little things that are going to set them back. A painful tooth, even just an extraction still costs. The stress of depriving themself or choosing more complicated ways of doing things to decrease costs can take a real toll on him physically and emotionally which can easily wipe out any sort term monitary gain.
I don't know if there is an answer to this question that is feasible. If eligible applying for public benefits including subsidized housing would make the most since. Getting into a HUD program that allows people to pay 30 percent of their income in rent would be something that would significantly beneficial over the long term. I don't know if that's possible, but it is something to look into.
Some of this does depend on the cost of living off where they are at, if public transit can be used, the stability of
current employment, and supportive resources available. For example, staying with parents can obviously significantly reduce housing costs, which would make money available. But that isn't an option for everyone and very very person dependant.
I really wish this person luck in his endeavor , it is such an important thing to do, but I'm not sure they are a place to realistically be able to do that. That isn't their fault.
posted by AlexiaSky at 1:26 AM on July 14, 2019 [8 favorites]
Honestly, I'd focus on the effort to increase income while stabilizing expenses. That's likely to lead to more productive savings over the long term and increase the probability of retirement funds at all.
If they want to save there are many little things that are going to set them back. A painful tooth, even just an extraction still costs. The stress of depriving themself or choosing more complicated ways of doing things to decrease costs can take a real toll on him physically and emotionally which can easily wipe out any sort term monitary gain.
I don't know if there is an answer to this question that is feasible. If eligible applying for public benefits including subsidized housing would make the most since. Getting into a HUD program that allows people to pay 30 percent of their income in rent would be something that would significantly beneficial over the long term. I don't know if that's possible, but it is something to look into.
Some of this does depend on the cost of living off where they are at, if public transit can be used, the stability of
current employment, and supportive resources available. For example, staying with parents can obviously significantly reduce housing costs, which would make money available. But that isn't an option for everyone and very very person dependant.
I really wish this person luck in his endeavor , it is such an important thing to do, but I'm not sure they are a place to realistically be able to do that. That isn't their fault.
posted by AlexiaSky at 1:26 AM on July 14, 2019 [8 favorites]
I wanted to comment a little further, because honestly the number one thing they can do to for their retirement is to ensure they are paying SSI and Medicare taxes if in the US.
Pay under the table, which can theoretically increase take home pay NOW, but long term the US safety net is designed to be more benefical to low income adults. Medicare is the miles better than medicaid for a variety of reasons. So, if they have to choose between take home pay increase to save a tiny bit or pay taxes when they reports income they should pay medicare and SSI taxes they should absolutely do the second. (They will likely get most of it back through tax credits anyway in their income bracket). There are arguments about what those programs will look like in 30 years time, and if they'll exist, but right now it does and assists lots of people.
I say this because over the years I've met a significant number of day laborors, construction crews people, roofers, waitresses,
hairdressers, etc who were doing OK themselves, then something happened. Because they weren't paying into the system, they were given the lowest benefit and medicaid only even though they had significant work histories.... Because they didn't pay the taxes so to SSDI and medicare they didn't qualify. SSI retirement is a barebones retirement plan. It really really is. It is designed to be supplemental but it is way better than nothing.
Please note one can qualify for SSI with no work history and medicaid. But one cannot qualify for SSDI or Medicare without paying into the system via taxes.
posted by AlexiaSky at 2:42 AM on July 14, 2019 [1 favorite]
Pay under the table, which can theoretically increase take home pay NOW, but long term the US safety net is designed to be more benefical to low income adults. Medicare is the miles better than medicaid for a variety of reasons. So, if they have to choose between take home pay increase to save a tiny bit or pay taxes when they reports income they should pay medicare and SSI taxes they should absolutely do the second. (They will likely get most of it back through tax credits anyway in their income bracket). There are arguments about what those programs will look like in 30 years time, and if they'll exist, but right now it does and assists lots of people.
I say this because over the years I've met a significant number of day laborors, construction crews people, roofers, waitresses,
hairdressers, etc who were doing OK themselves, then something happened. Because they weren't paying into the system, they were given the lowest benefit and medicaid only even though they had significant work histories.... Because they didn't pay the taxes so to SSDI and medicare they didn't qualify. SSI retirement is a barebones retirement plan. It really really is. It is designed to be supplemental but it is way better than nothing.
Please note one can qualify for SSI with no work history and medicaid. But one cannot qualify for SSDI or Medicare without paying into the system via taxes.
posted by AlexiaSky at 2:42 AM on July 14, 2019 [1 favorite]
What does this person’s banking situation look like? It’s possible that a (different) bank/ credit union would better meet their needs by having lower fees and/ or higher interest rates.
posted by oceano at 7:19 AM on July 14, 2019
posted by oceano at 7:19 AM on July 14, 2019
First, pay off credit card debts if there are any. Then, because their current tax rate is low and their timeline is long, I would go with a Roth. Set up direct deposit if you can to make it automatic. Look for the broker with the lowest commission, and buy ETFs or index funds with low fees.
They could use Robinhood, which has no commission, but I’m not sure if they offer retirement accounts. Still, saving the commissions would be significant over time, so maybe they could start there and then transfer the balance to a Roth once or twice per year, or something like that.
The most important bits are to make saving a habit, don’t carry credit card balances, and keep your fees as low as possible.
I wish someone would’ve told me these things when I was 30!
posted by spilon at 2:10 PM on July 14, 2019
They could use Robinhood, which has no commission, but I’m not sure if they offer retirement accounts. Still, saving the commissions would be significant over time, so maybe they could start there and then transfer the balance to a Roth once or twice per year, or something like that.
The most important bits are to make saving a habit, don’t carry credit card balances, and keep your fees as low as possible.
I wish someone would’ve told me these things when I was 30!
posted by spilon at 2:10 PM on July 14, 2019
"I'd suggest that focusing on retirement is not currently a good long-term goal. It might be more actionable to have a medium term goal of "regularly save at least $10,000 / year":"
I can't see how as time goes on it would ever become so cheap that I could suddenly save half my year's wages? The only money I have saved, was saved in periods when I didn't have a home and wasn't paying rent. I've already kind of written off ever paying back my loans, and just assumed savings and investments are for richer people. The savings I do have I think of as having in case there's something nice I want to purchase or when shit hits the fan and I have to like fix car or something terrible from which I presumably will not recover lol.
Often I wonder if there would even be a point, I've never once considered I'd ever be able to "retire" anyway and increasingly it seems unlikely I will even need to worry about living that long anyway.
posted by GoblinHoney at 3:25 PM on July 15, 2019
I can't see how as time goes on it would ever become so cheap that I could suddenly save half my year's wages? The only money I have saved, was saved in periods when I didn't have a home and wasn't paying rent. I've already kind of written off ever paying back my loans, and just assumed savings and investments are for richer people. The savings I do have I think of as having in case there's something nice I want to purchase or when shit hits the fan and I have to like fix car or something terrible from which I presumably will not recover lol.
Often I wonder if there would even be a point, I've never once considered I'd ever be able to "retire" anyway and increasingly it seems unlikely I will even need to worry about living that long anyway.
posted by GoblinHoney at 3:25 PM on July 15, 2019
This thread is closed to new comments.
posted by geegollygosh at 2:35 PM on July 13, 2019 [3 favorites]