How to Invest for Retirement on a $30,000 Salary

Everyone knows they should be saving for retirement. But, what if you only make $30,000 a year?

Yes, it’s possible to live within your means and sail into your golden years with a comfy nest egg.

With the median salary in the U.S. being less than $30,500 a year, according to Social Security Administration, it’s more important than ever to prioritize saving for retirement as soon as possible.

Combined with a little discipline and patience, here’s how to save for retirement when you make $30,000 a year.

1. Set a Budget

It might seem impossible to invest if you’re on a tight budget or living paycheck-to-paycheck.

In order to know how much money you can save for retirement, you’ll need to know where your money goes each month.

How do I start budgeting?

Figuring out a budget is the first step to understanding how much money you take in and spend each month.

Ultimately, you want to spend less than you earn.

Here are five simple steps to create a budget:

  • Know your after-tax income amount. Analyze your paystub to know the amount of money you receive each pay period after taxes and automatic deductions, such as the cost of health insurance.
  • List out your expenses. Create a list of monthly expenses by looking at your bills, bank statements, and credit card bills from the last three months.
  • Choose a budgeting tool. There’s a slew of free budgeting apps and tools to get you started, all from the convenience of your smartphone.
  • Create a budget with goals. You’ll want to set financial goals for yourself including establishing an emergency fund and investing in your retirement.
  • Track your progress. The most important step in budgeting is actually following the budget each month. The more diligent you are, the quicker you’ll reach your financial goals.

How much should you save for retirement?

A good rule of thumb is to save at least 10 to 20 percent of your income each month for retirement.

On the lower end, you’ll be able to save $3,000 in just one year. That’s a monthly saving’s goal of $250.

Start by looking at areas in your budget where you can cost. Daily, weekly and even monthly habits add up.

Do you splurge for a Starbucks coffee each day?

Spending $5 on a daily cup of coffee adds up to a staggering $1,825 a year, or $150 per month.

Why not buy a cheaper cup of coffee or brew your own? With one small change, you’re more than halfway towards your $250 savings goal each month.

2. Build an Emergency Fund

In order to plan for retirement, you need to think about long-term goals, including surprise expenses.

To stay on track, you want to plan for the unexpected by having an emergency fund.

An emergency fund is any money set aside to cover the cost of personal unplanned emergencies.

This might include the loss of your job, an unexpected house repair such as a flooded basement or high medical bills.

Experts recommend having enough money in your emergency fund to cover at least 3 to 6 months of living expenses. If that seems unattainable at this time, aim to save $1,000 and go from there.

Ideal Size of an Emergency Fund

To start... Ideal goal... Super safe...
$1,000 3-6 months of essential expenses 12 months of expenses

You can always contribute more to your emergency fund your situation changes, or if you get a large chunk of money at once, such as a tax refund.

In order to avoid temptation, it’s a good idea to open an account just for your emergency fund.

We recommend against savings accounts from big national banks as they tend to come with monthly fees and extremely low interest rates.

Since online banks don’t have the overhead costs of brick-and-mortar branches, the savings is often passed on to the customer.

Online savings accounts offer higher interest rates, lower or no fees and 24/7 access.

You might not think an emergency fund, or lack of one, impacts your retirement, but it can.

Being faced with large unexpected expenses can destroy your budget, and the amount of money you’re able to save for retirement.

Additionally, needing a large amount of money on the fly or not being able to pay your bills because you lost your job could lead to mounting debt problems.

3. 401(k) or IRA

Now that you’ve decided how much money to save each month, the next step is to figure out where to invest that money.

401(k)

The most well-known and easiest way to save for retirement is through an employer-sponsored 401(k) plan.

Employers offer 401(k) plans as a benefit for employees to invest in their retirement through automatic pre-tax deductions from each paycheck.

It’s common for an employer to match a certain percentage of an employee’s 401(k) contribution. The exact amount varies company to company.

Let’s say your employer contributes 50 cents for every $1 deposited into your 401(k), up to 5 percent of your salary.

Based on a $30,000 salary, if you contribute 10 percent of your salary each year, you’ll get an additional $1,500 from your employer, deposited directly into your 401(k).

Essentially, it’s free money.

Sign up for this benefit as soon as you can. You might need to be working for several months before you qualify to participate.

If your employer does not offer a 401(k) plan, you’re not eligible to participate or are looking for additional retirement investment options, consider opening an individual retirement account (IRA).

IRAs

An IRA is a type of retirement savings or investment account that offers big tax breaks.

Unlike a 401(k) program, you have the flexibility to pick your own brokerage account or financial institution to open the IRA. Additionally, you’ll have the freedom to choose how your money will be invested, and how risky you want those investments to be.

Vanguard, Fidelity Investments, and Charles Schwab are among the popular choices because they have a variety of funds with low expense ratios.

The money deposited into your IRA, known as a contribution, will then be used to invest in a variety of stocks, bonds, mutual funds and other types of financial assets.

Set by the IRS, you can contribute up to $5,500 each year to an IRA account. If you’re 50 years or older, you can contribute up to $6,500.

There are two main types of IRAs — traditional IRA and Roth IRA.

What’s the difference? The main difference is how the money is taxed — now or later.

A traditional IRA account is funded with pretax money. You’ll pay taxes on a traditional IRA account when the money is withdrawn in retirement.

On the other hand, any contributions made to a Roth IRA are with after-tax dollars. You won’t be taxed when you go to use the money down the road.

Another important difference between the two types of IRAs is how and when you can access the money.

You’ll be penalized for withdrawing from a traditional IRA account before retirement.

Contributions made to a Roth IRA can be withdrawn at any time, without any penalty.

Although living on $30,000 salary is doable, having access to money saved in your Roth IRA account can provide you peace of mind should you absolutely need to use that money down the road.

Traditional IRA Vs. Roth IRA

Traditional IRA Roth IRA
Contributions may be tax-deductible. Contributions are not tax-deductible.
Pay taxes upon withdrawal. Earnings can be withdrawn tax-free and without penalties if the funds were in the Roth IRA for 5 years and you've reached age 59 1/2.
You must be under age 70 1/2 to contribute. You can contribute at any age.
Required minimum distributions (RMDs) are required starting at age 70 1/2. No RMDs required.

Other types of investment accounts

You probably use mobile and online banking, but what about digital advisors for your retirement portfolio, also known as robo-advisors?

Robo advisors are automated online investment tools creating and managing personal investment portfolios.

In other words, a complex algorithm invests and manages your money, at a cheaper cost compared to a financial advisor.

Another added benefit is the low or even zero minimum investment requirement. Robo advisors allow even the smallest investor access to professional investment tools.

You’ll need to open an account online, link up your bank account for automatic deposits, answer some questions about your retirement goals and within minutes, you’ll have your very own personal investment portfolio.

Depending on your retirement goals, your customized portfolio will most likely include exchange-traded funds (ETFs) and index funds.

ETFs offer many benefits including diversification by investing in a “basket” of stocks or bonds and there is no minimum investment.

Index funds replicate the assets and performance of a specific index, such as the S&P 500, perform fairly consistent and are less risky than buying individual stocks.

Conclusion

Although retirement seems lightyears away, the more you contribute now, the more you will have in retirement.

Whether you want to travel the world, spoil your grandchildren or move to a retirement community in Florida, you’ll be thankful for the money put away years ago in order to live the good life.

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