How to Retire when you only make $30,000 per year
Most people think of retirement as a rich person’s dream. To retire, you need to wear a suit, earn hundreds of thousands of dollars per year, and invest most of it. With a multi-million dollar nest egg, you can finally “live the dream” of retirement. There is no way a household that earns $30,000 per year can ever afford to retire, right? Wrong. Even if your income is $30,000 per year, you can still retire, it just takes a little bit of planning.
If you make $100,000 per year, retiring is fairly straightforward. Max out your 401(k), max out your IRA, and you’ll have $4,691,000 assuming a 7% real rate of return for 40 years. With this nest egg, you can safely withdraw $187,000 per year from your retirement portfolio and just live on a beach in the Caribbean. While you are saving for retirement, you need to figure out how to live on about $4,000 per month which isn’t hard. In fact, you’ll live a life of relative luxury.
Low Income Retirement Case Study
There is plenty of advice geared towards high income earners that tells them exactly how to retire. In fact, I just summarized all of these: max out your 401(k) and IRAs. Retiring early has become “trendy.” There are plenty of resources dedicated to providing instructions on how to retire in 20, 15, even 10 years or less.
The problem with these is that they aren’t for the average person. They really aren’t even for people in the 75th income percentile (about $65,000 salary). Most people simply cannot afford to max out both their 401(k) and IRA. Ignoring the 401(k), maxing out your IRA can even be a challenge. Plus, there are always bills to pay, and things come up. So are low income earners screwed? No, they aren’t. If you want to find out how to retire if your household income is $30,000, keep reading.
First of all, why did I choose $30,000? According to 2014 U.S. Census data (as summarized on Wikipedia), earning $30,000 in household income puts you in the 25th percentile. If we take a look at the 25th percentile for individual income, we see that number is $20,000 per year. Most people would characterize this as low income.
We also know a little bit more about these households. For example, they are characterized by having 0.87 full-time working adults, with an average household size of 2.23 persons. Let’s just say 1 full-time working adult, with a household size of 2. This means our household has a single earner making about $20,000 per year. In addition, they earn about $10,000 in government benefits per year. This puts our household at the $30,000 household income figure. I’m obviously simplifying a lot of things, but it gives us a rough idea.
What type of households are we talking about? Here are a few examples:
- A single parent with a child
- A married couple
- 2 unrelated people living together
In the first scenario, you have a child so they cannot work. In the last two scenarios, your partner or roommate isn’t working, most likely due to a disability. There are obviously other reasons, and we won’t inquire why. We will not judge them, and we will not blame them.
On a $30,000 per year income, you can expect to make at least $2,000 per month after taxes between your salary and benefits, for a grand total of $24,000 – $26,000 per year. If you live in an area without state taxes, this number will be even higher. This is not a lot of money, but that won’t stop you from retiring. Quite the contrary, you can retire with this given some hard work, which starts at creating a strict budget.
Be Realistic with Your Expenses
Given that you earn at least $2,000 per month, you need to budget accordingly. This means:
- No expensive rent
- No expensive car payment
- No eating out for lunch and dinner every day
- No ridiculously luxurious vacations
Are any of these really hard? Yes and no. If you are only earning $30,000, don’t make the decision to live in New York City, Washington, D.C., or San Francisco. Just don’t do it. I say don’t do it because you cannot afford it. You aren’t making a lot of money, so you don’t live like it. In fact, don’t live anywhere near a big city. Find a city where you can find a reasonable rent for a 1 or 2 bedroom apartment, and live there.
As an example, you can find a 2 bedroom apartment in Rome, NY for $675 per month. This is right near the Air Force Research Lab so there are supporting jobs in the area. You could also drive to Syracuse or a neighboring town for work. Commuting is a solid 45 miles per direction which is expensive, but you can find smaller towns nearby.
Splurging on a car is very easy. I remember reading that the average new car price is north of $30,000 which is ridiculous. If you earn $30,000 per year between your pay and benefits, you cannot afford a $30,000 car. However, you can very easily find a reliable car for $8,000. For example, the Kelley Blue Book value for a 2011 Honda Civic in very good condition is about $8,100. On a 60 month loan at 4% APR, you are paying $147 per month. Even with a higher interest rate, you can stay below $200 per month. You could also find a slightly newer one for $10,000 and keep your payments below $200 per month.
Most people spend way too much money on food. In reality, if you very rarely eat out, it is not that challenging to feed each adult on $150 per month for a grand total of $300. I have spent a significant amount of time contemplating food budgets. The reason is that I have trouble sticking to them. But try it for yourself. See if you can feed each member of your family for $150 each. If you need help, check out meal prep sunday, a free resource to help you plan out your meals and spend very little money doing it.
Finally, you don’t need to go on fancy vacations. Vacations are expensive, very expensive. But they don’t have to be. I was able to to get an all-inclusive Dominican Republic 6-day, 5-night vacation for $699 on Groupon (airfare included). If you make $30,000 per year, maybe plan one of these every other year. You could budget $25-$30 per month and afford it.
You can always take a “staycation” or go on a road trip, two much cheaper options.
Building Your Budget
Now that we know what you can reasonably afford on your $2,000+ per month salary, let’s put together a sample budget. Most people suck a budgeting. To be honest, budgeting is easy if you stick to a few key principles. Keep your rent as close to 30% of your take home pay as possible. Keep your car payment + insurance + gasoline as close to 10% of your take home pay as possible. Try and save at least 10% of your income.
These are not steadfast rules. In fact, you’ll see that we break some of them to be realistic. Remember they are guidelines, not strict rules to follow. Just do your best. Here is an example budget that you can use.
Rent: $675 (utilities included)
Car Payment: $150
Car Insurance: $100
Health Insurance: $200 (or $0 if you are in a generous state like NY)
This is mostly it. You’ve got your housing, transportation, food, and health insurance taken care of. You have a budget surplus of $515 per month, which is $6,180 per year. I know what you’re thinking, nobody can live on $1,500 per month. But there are plenty of people who do it. It will not be easy at first, but it is definitely doable.
If you have trouble budgeting, you’re in good company. Pretty much everyone does. If you want to find out ways to reduce your spending, check out how I’m on track to reduce my spending by $18,432 this year with the Zero Day Challenge. Not only will it help you save money, but your mindset will become more frugal and saving money will become significantly easier.
Invest the Rest, Retire Comfortably
In our sample budget, we have $515 of extra money per month. Most people would just spend it, but we want to comfortably retire when we turn 65. So instead of spending it, let’s save it.
To start off, let’s add $215 of “padding” to our budget above. Maybe you can’t find an apartment this cheap or your insurance is more expensive. Gas prices change, and there are always things that just come up. You could also use this $215 to build your emergency fund, maybe you add in toiletries and going out to dinner once or twice a month because you only live once. Regardless, we’ll subtract $215 for extra expenses every month.
This leaves $300+ per month to save for your retirement. You need to invest this $300 per month in your Roth IRA. You almost certainly want to choose a Roth IRA because of the tax benefits. When you invest in a Roth IRA, you invest post-tax dollars and you can withdraw your money tax free.
In addition, you get some nice tax breaks. Your $20,000 (remember $20,000 salary + $10,000 government assistance) income becomes $0 after two standard deductions and exemptions. You get this because you live in a 2 person household. With an adjusted gross income of $0, you don’t owe any federal taxes. In addition, you can use the saver’s credit to further reduce your taxes (if you happen to owe them).
Now that you’ve made the decision to $3,600 per year in your Roth IRA for 42 years, what happens to it? Your portfolio will grow. Slowly at first, but it starts to seriously pick up steam after 15 years. We’ll assume that you never get a pay increase so you cannot increase your contribution.
After 42 years at 7% portfolio growth, right as you turn 65, your nest egg will be worth $830,000. This will produce $2,766 per month in income. In addition, you’ve earned social security. The average social security benefit is about $1,300. Let’s say yours is only $1,000. Your monthly retirement income is now $3,766. Almost double what you made during your working years.
This doesn’t even take into account the spousal Social Security benefit. Whether or not you live with your partner, just marry them, and they’ll get half of your Social Security check. Your household income in retirement will now be $3,766 + $500 = $4,266. This is the equivalent of $51,192 per year in retirement spending.
Sacrifice and Planning
Hopefully, you can see that retiring on $30,000 is completely possible. In fact, it is highly probable given a little sacrifice and planning.
The first thing it takes is sacrifice. You don’t need a $1,500 per month posh studio apartment in a nice area. You don’t need to blow $100 every Friday night at the bar. These are all luxuries that don’t really improve our lives very much. Honestly, I don’t consider them sacrifices. But remember we subtracted an additional $215 for your budget. This can cover a few meals at restaurants or other luxuries. I really subtracted this so you could enjoy your working years.
The second thing it takes is planning. You need to stick to your budget, and invest whenever you can. This means taking that $300, not spending it on takeout, and depositing it into your Roth IRA for 42 years. This isn’t trivial. In fact, it’s really tough. Most people lack the discipline to do it. But if your household only makes $30,000 per year, you need to figure out how to do it. In the end, the results are worth it.
Anyone Can Retire Comfortably
I’m not lying and I’m not being hyperbolic. Anyone can retire comfortably. In this thought experiment, we haven’t given any increase to our income (outside of an implied yearly increase commensurate with inflation). We are also focusing on households with 2 people in them, but only 1 person is working. If you are living with your child, they will eventually move out and you can get a smaller apartment and save money on groceries.
In all honesty, if you are making $30,000 per year, you have an income problem. There are plenty of free resources where you can learn new things, such as the Internet or your public library. Both are free. You can always learn a topic and try to side hustle like tutoring for extra money. You might even be able to pick up an extra day or two of part-time work bartending, being a nighttime Hotel monitor, etc.
We also based this thought experiment on being a 25th percentile household with a 25th percentile individual income. 75% of households and 75% of people make more money than this. So if your household income or individual is more than these numbers, retiring is even easier with some work. I would implore you to try and improve your situation with a bigger salary.
I hope that I’ve convinced you that anyone can retire comfortably with a little sacrifice and planning. Most of my readers fall into the category of $75,000+ income per year. For everyone who earns less and even significantly less, you can do this! If you need any help, please comment or send me an email at david[at]zerodayfinance[dot]com.