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It’s possible to save for retirement at age 50 with only a $30K salary

Over the past four weeks, I wrote about how to start with nothing (or less than nothing) at age 50 and create a successful retirement plan. For my example, I chose a $60,000 annual income because I had to choose something. While many of you thought I chose a good figure to base things on, some of you made it clear that you thought I set the salary too high.           

On Twitter, for example, Jill E. wrote “@PeteThePlanner, Write a retirement planning at age 50 article when you have something to say to low-income people." 

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Today, to address the concerns of readers such as Jill, I'm going to show you the financial reality of earning $30,000 annually at age 50 and attempt to show that there is a successful retirement plan out there with that wage.          

To review, the original plan consisted of:

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• Eliminating debt over a two-year period.

• Immediately cranking retirement savings up to 8 percent (5 from you and 3 from your employer).

• Reducing spending by 10 percent and using the increased cash flow to aggressively fund retirement.

• Control housing costs (and eventually eliminate them) through homeownership. The plan assumes a 50 year old earning $60,000 annually, yet has nothing saved for retirement and also has some consumer debt.

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Believe it or not, much of this plan holds true for someone earning $30,000 annually, too (although the debt situation is likely a bigger problem).          

For someone earning $30K, your current monthly take-home pay is roughly $1,781. This is after paying reasonable health insurance premiums and contributing 5 percent to an employer-sponsored retirement plan (a 401(k), for example) with a 3 percent employer match. It wouldn’t be unusual for a person to need every penny of that $1,781 for monthly bills, depending on what the cost of living is in the area you live.           

The big assumption here is you are earning a living wage. Simply, this is the hourly rate a person must earn to support their household based on a 40-hour work week. You can find what the living wage is in the county in which you live by visiting livingwage.mit.edu.          

Frankly, if you earn below the living wage threshold for your area throughout your career, you’re merely trying to survive until Social Security income kicks in. I would consider it quite an accomplishment to make it to retirement age earning only living wage and not be drowning in consumer debt.

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If you’re earning $30,000 annually, you will want to work as long as you can, ideally to age 70, to drive your eventual Social Security retirement benefit to it's maximum rate. Do that and you will get an estimated $1,543 monthly (in today’s dollars).          

If your monthly take-home pay is $1,781 and your Social Security benefit will be $1,543 in today’s dollars, it seems you have a shortage. You actually don't. After factoring in projected inflation over the next 20 years, your monthly income will be $2,720 monthly (if your employer's raises keep up with inflation). Social Security will also be keeping up with inflation through cost-of-living adjustments (COLAs) and, according to the Social Security Administration website, you’ll have an estimated $2,955 available to you (using a consumer inflation rate of 2.14 percent). That's more than you are earning (inflation adjusted).

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There's more good news. If you were squirreling away 5 percent of your income and getting a 3 percent employer match, your employer-sponsored retirement plan would have approximately $150,000 in it (based on a 7.17 percent annual rate of return – the last 20-year average of a 60/40 stock/bond portfolio). This $150,000 can be used to create an income stream of a couple of hundred dollars a month, or it can be used as a giant emergency fund.

So, even at $30,000 a year salary, the math works. You can retire successfully. If you can avoid a giant “but.”

Your downfall will be if you have to ask the question: “But what if I have or acquire consumer debt?”           

It's really the heart of the problem for everyone. If you can’t live within your means, justifiably or not, none of what I just explained will work. And at $30,000 of income, your margin for error is razor thin. The lower the wage, the harder it is to financially absorb the inevitable bumps that come with life. 

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When you add in the inevitable rising housing costs, rising health care expenses and a growing income gap, the outlook for those earning a lower income becomes quite bleak.          

It is possible to have a successful retirement as a low-income earner, but the need for luck is definitely a factor in the equation. I don’t like praying for luck as a financial strategy but, unfortunately, it’s the harsh reality for way too many American workers.           

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