The Single Best Retirement Saving Strategy for Low-Income Workers

If you're a lower-income earner, your income probably ranges from $28,000 to $55,000. Unless you live in one of the least expensive parts of the United States, it's likely that you're stretched thin on occasion -- and that can make saving for retirement particularly challenging. However, it's not impossible to put money away for your golden years. Here are some of the ways it can be accomplished.

Take advantage of tax-deferred retirement accounts

Regardless of how much money you earn, you probably think about retirement at least occasionally. You want to invest, but you're afraid you don't have enough money and aren't quite sure how to get started.

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The single easiest way to save for retirement is to take advantage of tax-deferred retirement accounts. When you invest in a tax-deferred retirement account (like a 401(k) or tax-deferred IRA), those contributions are not taxed until you begin making withdrawals.

Imagine that you live in Ohio and earn $40,000 annually. After deductions for federal and state taxes, Social Security, and Medicare, you bring home roughly $639 a week, or $33,228 annually.

The beauty of contributing to an employer's retirement plan is that you save for the future while minimizing how much you pay in taxes today. Take a look at this example to see what we mean:

• You work for a company that provides a tax-deferred retirement plan.
• Your employer matches up to 3% of your monthly contribution. You realize that this is "free" money and sign up.
• You're worried that too large a contribution may leave you short on cash each month, so you sign up to contribute 3% of your income, knowing that your employer is going to toss a matching 3% into your retirement fund.
• Your take-home pay drops by $20 per week, which amounts to $1,040 less deposited into your checking account annually. However, by contributing $20 per week, you end the year with $2,080 plus interest earned in your retirement account ($1,040 contributed by you and $1,040 contributed by your employer).

You may be surprised by how quickly you become accustomed to making that contribution. In fact, one of the easiest ways to build a retirement account without causing yourself discomfort is to increase your contribution by 1% per year.

One final word about pre-tax contributions. Contributing to your retirement account directly from your paycheck rather than handing over cash from your bank account takes a whole lot of the sting out of investing. Essentially, it's a "set it and forget it" scenario. It's easier to adapt to a situation that will automatically take place without you going to any trouble.

Create a "little at a time" plan

Let's say you can come up with an extra $20 weekly to invest for retirement, but don't work for a company offering a retirement plan. It may not sound like much, but given enough time, $20 a week can still grow into a plump little nest egg. Take a look at this example, based on a 30-year-old who begins investing $20 weekly.

• They find $20 a week to put into an IRA, earning an average of 7% interest annually.
• They continue to invest $20 weekly until they retire at age 68 (equal to $86.66 per month or $1,040 annually).
• Their investment is now worth $178,083.

But what would happen if that person doubled their investment every 10 years? It could look something like this:

Ages 30-40: Invest $20 weekly

• $20 per week invested (equal to $86.66 per month or $1,040 annually)
• After 10 years of investing with an average annual return of 7%, the retirement account is worth $14,259

Ages 40-50: Invest $40 weekly

• Carryover $14,259
• $40 per week invested (equal to $173.33 per month or $2,080 annually)
• After 10 years of investing with an average annual return of 7%, the account has a balance of $56,733

Ages 50-60: Invest $80 weekly

• Carryover $56,733
• $80 per week invested (equal to $346.66 per month or $4,160 annually)
• After 10 years of investing with an average annual return of 7%, the account is now worth $168,968

Ages 60-68: Invest $160 weekly

• Carryover $168,968
• $160 per week invested (equal to $693.33 per month or $8,320 annually)
• After eight years of investing with an average annual return of 7%, the account would now hold $375,639

At age 68, they would have $375,639 to take into retirement.

If you can't possibly imagine a way to invest for retirement given your current financial situation, it may be because you assume that your contributions must meet a specific threshold or that small contributions don't count. Nothing could be further from the truth. Your aim is to build up a block of money you can draw from in retirement, but there's no rule that says the block must be made up of large contributions. Remember: It's okay to start small.