I made less than $40,000 a year but I still managed to save $100,000 for retirement by age 40. A recent article by Fox Business says people shouldn’t let a low salary dissuade them from saving for retirement. It’s true that people who earn less now will need less money in retirement to maintain the same lifestyle. At age 40, I stopped saving as much for retirement because I could depend on dividends to grow my retirement savings. According to the article, people who earn more money aren’t any more likely to feel prepared for retirement. An American Consumer Credit Counseling survey found 86 percent of people who made $20,000 to $30,000 felt unprepared for retirement as did 79 percent of those earning six figures. A member of Generation X, I have not let pay cuts or the Great Recession sabotage my future.
Setting a goal
Instead of setting a goal to have X amount in savings by the time I retire, I set a goal to save a percentage of my income. I’ve always believed in the 10-percent rule, which means I set aside 10 percent of any money I receive no matter what. I pretend I never had the 10 percent. When I was in my early 30s, I saved 10 percent for retirement. Once I hit 40, I actually decreased my goal to 5 percent. I use the other 5 percent to pay down my mortgage and car loan so I can be free of debt by age 50.
Making it automatic
The Fox article points out the benefits of automating the saving process. I know I’d never save money for retirement if I didn’t allow my brokerage firm to automatically deduct 5 percent of my paycheck for my 401(k) plan. I choose to have my automatic deductions go into a Roth 401(k) instead of a traditional 401(k) so that I won’t owe any taxes when I’m older. I don’t know whether I’ll be in a higher tax bracket when I’m older.
Saving my tax return
In addition to automatically saving part of my paycheck, I use part of my tax refund most years to fund my Roth IRA account. According to a recent Bankrate.com article, 28 percent of those surveyed planned to save their tax refund, while 30 percent wanted to pay down debt. Seven percent intended to splurge on a vacation or shopping spree, while 26 percent had to spend their tax return on necessities. From my perspective, retirement is a necessity for my future self. It’s unlikely I’ll receive the full Social Security benefits in the future due to the failure of the program.
I didn’t set out to save $100,000 for my retirement by age 40, but I did make saving a priority. My goal in my 40s is to save 5 percent of my income for retirement while becoming completely debt free. I am fine with the fact that I may not have a million in my retirement account by the time I retire. I’m also fine with the fact I may have to work until I’m 70. I don’t feel like I’m limited by my low salary when I have freedom to invest my money however I feel is best for me.
More from this contributor:
Making it to a Million with Dividends
Only the Rich Will be Able to Retire
My Gen-X Retirement Timeline
