Here's What Happens When Low-Income Earners Start Saving for Retirement Early

If you make a limited income in the United States, the idea that you could ever retire may seem like nothing more than a fantasy. But the reality is, you could actually end up with quite a lot of money in a brokerage account. In fact, even if you are among the country's lowest earners, it's possible you could become a millionaire.

The key, though, is to get started saving very early. Here's what happens if you make very little money, but you start investing at a young age.

Early savings could lead to retirement wealth even for low-income workers

Saving and investing for retirement doesn't take a whole lot of money if you have the power of time on your side. That's because once you get your money into the stock market and it begins earning returns, you don't have to use your limited dollars as your sole source of wealth building. The money you have already invested can earn returns and grow your account for you -- this is called compound growth.

The more time you allow for this to happen, the wealthier you can become -- even if you contribute very little of your own cash.

Say, for example, that you want to end up with $1 million by age 65 -- a pretty lofty goal if you aren't making a lot of money. But if you start saving at 25 years old and have 40 years to hit your target, you would only have to save and invest $188.28 every month to end up a millionaire assuming you earned a 10% average annual return.

U.S. Census data shows that the lowest-earning quintile of workers had an income of $30,000 or less, while households in the second-lowest quintile had incomes of $30,001 to $58,020. So someone who earned $30,000 would be classified as a low-income individual. Even for that salary, a contribution of $188.28 a month would be just around 7.5% of their income at most -- which is a lot, but not impossible.

Tax breaks and matching contributions can make saving even easier

The good news is, low-income workers may not even have to actually find $188.28 of their own money each month to save enough to become a millionaire. That's because there are systems in place to help.

For those who have access to a workplace 401(k), many companies provide employer matching contributions. These contributions might be a 100% match on up to 4% of your salary or a 50% match on up to 6%, or some other combination. If you made $30,000 and your employer provided a 50% match on up to 6% of your salary, it would contribute up to $1,800 for you if you invested at least $3,600.

Even if you couldn't do that and invested just $1,000 a year, you'd still get a matching contribution of $500. And a $1,500 annual investment over 40 years would still turn into $663,934.09 in retirement savings by age 65.

Of course, not all workers get a 401(k) match. Many low-income workers don't have access to a 401(k) at all, much less to matching contributions. But that's OK. You can still open an individual retirement arrangement (IRA) on your own pretty easily. Just check out the best brokerage firms for IRAs. IRAs allow you to make tax-deductible contributions up to an annual limit. And these tax breaks help make saving easier.

Say, for example, you made your $188.28 per month contributions to your IRA:

• You'd be investing $2,259.36 per year and could deduct that much from your taxes.
• The amount you could save would depend on your tax bracket. If you were in the 10% tax bracket (where you'd likely be after claiming deductions when you have a $30,000 annual income), deducting your IRA contributions could save you $225.94
• Your $2,259.36 contribution would only cost you $2,033.42.

Lower-income folks would likely also qualify for the Saver's Credit if they contribute to a retirement plan. This gives you a tax credit equal to either 10%, 20%, or 50% of your eligible contribution back as a tax credit (depending on your income). You can claim this credit for up to $2,000 in contributions. The amount you're eligible for is based on your adjusted gross income (AGI), which is income minus eligible deductions, such as IRA contributions.

If you were able to claim a 20% credit on $2,259.36, you'd get another $451.87 off your tax bill (credits, unlike deductions, reduce your income on a dollar-for-dollar basis).

So, the table below shows what this could look like:

And this is assuming you don't have a 401(k) match, or qualify for the 50% Saver's Deduction credit and you might, depending on AGI. So for around $1,500 a year or less, low-income workers could become millionaires if they start saving for retirement early.

It's absolutely worth trying to save that much to set yourself up for your future security. So, get started ASAP and make your money work for you.