How to Start Investing and Saving for Retirement When You Don’t Make a Ton Of Money

by Mackenzie Stewart

If you follow any personal finance page you probably saw a plethora of posts saying something along the lines of, “If you invest $500 a month, you’ll be a millionaire by [blah blah date].” They’re not wrong. However, those numbers are not going to work if you’re only making minimum wage.

Instead of throwing the idea of retirement out the window because you can’t hit that benchmark, I’m going to break down how you can prep for retirement, even with a low income.

Saving for retirement 

Right off the bat, I’m going to tell you not to compare yourself with the TikTok fin-fluencers rolling in six-figure salaries at 26. Across social media, we only see the big moves – the putting fifty, sixty, or seventy percent of a paycheck into Robinhood or a 401K move. Those of us with small salaries don’t have many examples of what our progress really looks like. I mean this in the most loving way possible: Focus on your finances and lower your expectations on what you can contribute financially without a toxic comparison.

Take small steps toward saving and investing

That is not where we are currently at and it will cause more harm than good to try and move at that level right away. You don’t run into a gym and immediately lift 200lbs. Not even the pros do that. You warm-up. You start small, and then work up to the big numbers. You gradually build the muscle. Retirement investing is the same way.

With that reality check done, let’s look at the basics of retirement. I’m going to keep this very minimal to start because retirement investing is a big topic.  

Three basic types of retirement accounts

First, let’s cover the three main types of accounts you’re going to come across and how they work. There’s an employer-sponsored 401k (Roth or Traditional), a Roth IRA (Individual Retirement Account), and a Traditional IRA. 

As the name suggests, an employer-sponsored retirement account is one that’s offered by your employer.

401k Basics

If you have the option of an employer-sponsored 401K, this is going to be the easiest place to start. You simply wait your 90 days (or however long your probationary period is), get with HR to complete your paperwork and you’re done! You now have a 401K! If your job doesn’t offer retirement benefits to you, no worries. That’s where the Roth IRA and Traditional IRA come in because those can be set up outside of your job through companies like Fidelity, Vanguard, or Charles Schwab. 

Roth IRA and Traditional IRA

 What does “Roth” versus “Traditional” mean? These denote a difference in when you pay taxes on the money you have in a retirement account. A Roth account is set up so you pay taxes on that money now. That way, come retirement, you get that money free of any tax deductions. A Traditional IRA is set up so you pay taxes once you’re retired and taking money out of that fund. This is also the same way a Roth 401K or Traditional 401K works if you have retirement options through your employer. 

What does that look like with real numbers? Don’t worry. *Dramatically takes off glasses*

 I got you.  

We’re going to imagine you make $30K a year. You choose a Roth-style account. At the end of the year, you’ve contributed $5,000 to that retirement fund. Come tax time for that year, you’re paying taxes on the full $30K you made. However, when you retire, you will not pay income tax on that retirement money because, well, ya already did. A Roth style account is like a gift card to your future self.

Paying taxes later with a Traditional IRA

 Now, if you chose a Traditional style account, it’s going to look a bit different. You made that same $30K and contributed that same $5,000 to your retirement account, but you’re only going to pay taxes on $25K worth of income for that tax year. You end up paying less in taxes right now, which is cool. However, come retirement time, you now need to pay income tax on that retirement money.

 Once you’ve figured out where your retirement account is held and which type of account you want, the next thing we figure out is how much can you afford to put into these accounts?

Deciding how much to save for retirement

 This is where the low-income bit throws its wrench. We have to use some mental trickery to get comfortable putting money where the intention is to not touch it for 30 to 40 years. 

Practicing saving (especially for retirement)

 We have two options to start: pay in a set dollar amount for every check or pay in a percentage of your earnings. If you are low-income or your income fluctuates because you don’t have set hours, I highly suggest starting with a set dollar amount. This is what I did initially with my employer 401K. Then, when I was comfortable enough, I switched to a percentage. However, I still use a set dollar amount in my personal Roth IRA.

 Why a set dollar amount when saving for retirement

It’s easier for us to put that in a budget. Especially for you guys with income that changes based on what you’re scheduled to work. It’s much easier to plan for $25 a check than figuring 2% of whatever your income comes out to this payday. 

This is also where you need to be realistic about what you can contribute. My initial contribution was $25 a month. Compared to other people, this is extremely small potatoes. Even so, that was all I could afford. 

 It can be so discouraging to have to start with such a small amount. It feels like chipping away at a mountain with a toothpick. 

 You will not be stuck at that point forever. 

Start saving as soon as possible

 The key to retirement is starting as soon as possible. Even if you are 30+, start now. The longer you wait the more money you are LOSING. 

 Those $25 deposits add up quicker than you realize. 

Small, frequent steps add up over time

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Those $25 deposits are still making you money in the form of dividends, which then INCREASE the amount of money you make money on. 

 A small amount now also eases you into the whole process. Start with $10 a month or even $5. Get comfortable with that amount. Maybe in a month, you realize you can double it and still be within your budget. Then, oh my! You get a raise! Now you can bump up that contribution by another $1 or two.

By the end of the year, you don’t even notice the money coming out and you have the beginnings of a more financially set retirement. 

Why does saving get easier over time?

The status quo bias means people prefer that things stay as they are, including regular intervals of automated savings.

 I know you have some questions, so let me run through a list of random but important things to know about these accounts. 

Frequently Asked Retirement Savings Questions

1) You can have an employer-provided 401K and one you set up outside of work and it’s fairly common to do so.

I have a work 401K, a Roth IRA, and a brokerage account. Investing is a big world and you don’t have to have every account under the sun, an additional account or two is something to consider once you get comfortable with the whole process. 

2) Once you start automating your savings, you still need to invest WITHIN that retirement account.

Think of it this way: the account is the car you’re using to get to retirement, the funds you invest in are the gas. You must assign the money you saved to something or it will sit there, making nothing.

How do you know what to invest in?

You have a ton of options that you can dive into. One of my first steps was using a TDF until I grew more comfortable looking at other options.

A Target Date Fund is called such because it’s based on the target date of your retirement. These are a grab bag of all kinds of stocks, bonds, funds and more so you get your hands on a little bit of everything in the stock market. This is one of the safest ways to grow that money because it ensures if one industry is having a rough time, the others in that fund keep your whole portfolio from tanking.

I currently use one dated for 2055, which would make me 65 when I retire and that’s the common age you’ll see referenced. Funds that are 10 plus years out tend to be structured a little more aggressively because you have the time to make up for any loss. Funds with dates closer to the current year will be more conservative so there’s less of a chance of taking significant losses so close to retirement.

3. You also need to invest funds if you’re using a retirement account not provided by your job.

Again, the account is the car, the investments are the gas. You still have the option for Target Date Funds through a Roth or Traditional IRA set up with Fidelity or Vanguard or another company. You also have access to a magical thing called an ETF, or an Exchange Trade Fund. I’m going to link to an article from NerdWallet because these are a good pillar to understand more of, but I can’t fit it all here.

A general summary: Target Date Funds tend to be more general investments, while ETF is more industry specific. Some ETFs focus on social media and include stocks from companies like Facebook, Twitter, Etsy, and the like. Other funds focus more on technology and include Alphabet, Tesla, and Apple. ETF’s let you grab a slice of multiple companies in one industry. Remember, diversification is your friend (because it reduces risk) and ETF’s are a great way to ensure you have a piece of everything. 

4. Speaking of diversification, you need to do it.

With a 401K through your job, you will see a lot of fund options from Target Date Funds to funds with titles like Small, Medium, or Large Cap. Again, I’m going to link to a little article to explain more about those last three. While you want more of your 401K money in a Target Date Fund, it doesn’t hurt to look at those other three to have more fingers in more things. IRAs have ETFs and funds that span many industries. It’s important to look at what companies are in any ETF. There’s a lot of funds that have a majority of the same stocks like Apple, Facebook, Alphabet, etc. Make sure you grab funds that aren’t all composed of the same thing.

5. There’s always gotta be sneaky things in money and for retirement accounts, it’s the hidden fees.

There will always be fees with any type of investment. The company you’re using puts in time and resources to maintain this stuff so of course, they’re going to try and cover that cost. They may not seem like a lot in the beginning, but as your retirement account grows, that fee takes out a bigger and bigger chunk of your money. Investopedia has a phenomenal breakdown of fees in this article because again, there’s too much to cover in this little paragraph. 

6. You will have times where it looks like you’ve lost money.

Yes, I said it. That is a big fear for low-income investors because losing money is something we can’t afford. I 100% thought this too. Especially having lived through the Great Recession of 2008. Anything and everything will have seasons of loss. Everything. You didn’t get through high school without a few bad grades, right? The stock market is no different. When you pull back and look at the big big picture, however, it statistically always delivers. If you make rash or bad investment decisions that may look different, but generally, you come out with more money than you put in. Whether the bad parts because really, you only lose money if you sell whatever you’re holding.  

 7. If your employer offers a 401K match (meaning they put in money matching whatever your contribution is up to a certain percentage of your income) take advantage of that.

Most companies will offer about 3%-6%. If you put 3% of your income into a 401K, they will also put 3% of their money into your 401K. Pretty neat huh? It’s free money! You might not want to jump to the full amount they’ll match at first. Start with 1%. You can always increase or decrease the amount at any time. Eventually, try to make it to the full match so you’re getting the full amount of free money from your job.

 8. If you leave your job, take your 401K money with you.

You can roll your retirement money into different accounts when you leave your job, but I’ve made the unfortunate mistake of cashing out a 401K TWICE. I needed the money then, but damn do I wish I had left it alone! Not only did I lose out on the returns, but I had to pay taxes and penalties to withdraw them early since I’m not at retirement age.

What does being “vested” mean in terms of your retirement account with your employer

You can also reduce the amount you can take with you if you aren’t vested with your employer yet. Wtf does vested mean? It means that you’ve spent a certain amount of time with the company and if you leave, you take not only your retirement contributions with you but the additional they’ve deposited if they offer a match as well. My company does it on an increasing percentage for each year of employment. I’m rolling into year three, which would allow me to take 75% of their match with me. After 5 years, I get all of it.

If you are switching jobs or moving to a job that doesn’t offer retirement benefits, you can roll over your funds into a personal Roth or Traditional IRA. It’s a fairly easy process and I would recommend calling the company you are moving to and have them help you set that up. Remember to make sure once the funds are moved that you invest them. That is the gas to make the car move. 

9. There are limits to how much money you can contribute to both of these and different deadlines to hit those limits each year.

We’re not going to focus on that because those thresholds are probably higher than what you’ll be able to contribute for now, but when you get there:

Did that put you in an information overload? It’s okay. My brain feels a little mushy just writing about it! Retirement is beyond a lot to absorb. You don’t need to know it all. It’s probably better that you don’t honestly.

Here’s a rundown of the basics of what you need to know to save for retirement on a lower income:

  1. Decide if you’ll use your employer benefits or open an account on your own.
  2. Decide if you want a Roth (taxed now) or Traditional (taxed later) account.
  3. Figure if you want to set aside a set dollar amount or percentage of your income.
  4. Make sure once the funds are in your retirement account, you put them INTO investments like a Target Date Fund or Exchange Trade Funds.
  5. Work up to your employer match if it’s offered or get close to it.
  6. Keep an eye on fees.
  7. Most importantly, start ASAP and don’t feel like $5 isn’t enough. It’s more than enough right now.

Retirement can feel like a very far-off dream when you’re in your 20’s. Don’t rest on that. It comes quicker than you realize. By putting off investing for retirement now, you’re costing yourself money later. We will all get to a point that we literally cannot work anymore. It happens whether we’ve saved enough or not. Look out for yourself now so you can have a financially stress-free retirement. Retirement investing is putting your oxygen mask on first. It protects your kids so they’re not having to put off investing for their future to take care of you financially once you can’t work.

Do it now. Do it consistently. Do it with whatever amount you can without hurting your budget. 

Related Reads:

Compound interest Explained

401(k) v IRA for the Self-Employed

How to Save More Money

Are You on Track to Save for Retirement?


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