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Saving for retirement is something you may be inclined to put on the back burner -- especially if your salary isn't enormous and you need to prioritize immediate bills like groceries, utilities, and rent or mortgage payments. But if you don't save for retirement, you might end up in a pretty bad place once your career comes to an end. So it's important to make an effort to save for your senior years as best as you can.
If you earn a $200,000 salary, it's conceivable that you might be able to save a nice chunk of money for retirement each year. But what if you earn just $50,000 a year? That may be enough to pay your bills. But it probably doesn't leave you with a ton of wiggle room to fund your long-term savings.
That said, it's important to set realistic goals for your retirement savings. And you should know that with the right strategy, even small retirement plan contributions can go a long way over time.
A savings plan needs to work for you
If you search the internet, you'll see that many experts advise saving 15% to 20% of your income for retirement. And if you can pull that off, great. But if you can't manage to save 15% to 20% on a $50,000 salary, don't sweat it.
You can't sacrifice your near-term bills to fund a retirement plan instead. So rather than focus on these percentages, take an honest look at your spending and try to figure out what a reasonable monthly contribution might look like for you.
If you're able to save $200 a month, or $2,400 a year, it's a little less than 5% of your salary. And while that's below the 15% to 20% experts like to recommend, if it works for you, then that's the amount of money you should be saving. Period. If you can swing $300 a month, even better. If you can only afford $100 a month, that's fine as well.
Your monthly retirement plan contribution has to be a number you can afford without causing yourself financial stress. The good news, though, is that if you contribute to a traditional individual retirement account (IRA), that money goes in on a tax-free basis.
Put another way, if you contribute $2,400 to an IRA this year, the IRS won't tax you on $2,400 of your salary. If you're single earning $50,000 a year and have no other income, you're in the 22% tax bracket. So a $2,400 IRA contribution has you paying the IRS $528 less.
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How to make small retirement plan contributions work for you
You might assume that if you're only making small contributions to a retirement account, you're not going to end up with that much money. But you may be surprised at how much wealth you're able to grow if you start saving for retirement from a young age and invest your money in stocks.
Over the past 50 years, the S&P 500's average annual return has been 10%, accounting for years of solid gains as well as years when the market tanked. Let's be a bit more conservative and assume you'll get a 9% return in your IRA. If so, here's the balance you're looking at after 40 years, depending on your monthly contributions.
| Monthly Contribution | Ending Balance After 40 Years* |
|---|
| $100 | $405,000 |
| $200 | $811,000 |
| $300 | $1.22 million |
Data source: Author's calculations. *Note that numbers are rounded.
None of these are small figures. In fact, as of 2022, the median retirement savings balance among Americans aged 65 to 74 was $200,000, according to Federal Reserve data. So even if you're only able to save $100 a month based on your $50,000 salary, you could potentially retire with more than twice that median balance by contributing to an IRA over 40 years and investing in stocks.
Of course, as your salary increases over time, so too should you aim to increase your IRA contributions. The point, however, is that saving to the best of your ability could go a long way, so don't sweat it if you're only able to contribute so much from your paychecks on a $50,000 salary.
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