Ask the grumpies: How much to save when your salary is small?

Leah asks:

I comfortably live on my salary with no issues. I easily put away 50% each paycheck (between savings and retirement). But my salary isn’t huge. Should I be digging deeper to find some less-easy money to amp up my retirement or savings account? I’m contributing to my 403(b) but not really my Roth IRA because I don’t know how to use my bank’s interface. Yes, lamest excuse ever.

Also:  How does my spouse saving for retirement impact my savings? As in, is it okay to not save quite as much? I’m saving, but I’m not saving 15% of my income for retirement. [Ed:  this means 50% of her income is going to general savings + retirement, but less than 15% is going to retirement]

And: I started saving at 30 for retirement. How much do I have to save?

It’s only been a little over a year since you asked this question, and it’s not like your family situation has changed at all, say, by having an adorable baby.  (*Cough*)

If you’re really only living on 50% of your paycheck, then that means you’re doing fine for retirement. Saving 50% starting in your 20s (even late 20s) will allow you to have more money than you need later on, if you keep those living expenses low.

However, some of your living expenses are probably subsidized by your husband.  So you’re probably not really living on just 50% of your income.  You will need to figure out as a family unit what your joint savings and joint spending is and what it’s likely to be in retirement.  What kind of retirement do you envision as a family?  What risks are there in the future?

As a general heuristic, you want to save 10-15% of your (joint) income for retirement.  If you didn’t start until you were 30, then you probably want to aim closer to 20% (or more).  But again, this is going to depend on what your husband is doing.  Even if you have separate finances in most areas, you will most likely be sharing living expenses now and in retirement, just assuming that you want to keep living with each other.  (And in the unthinkable event of divorce, many states are community property meaning they cut your assets in half no matter how many assets there are.)

In terms of whether or not you should dig deeper… well, that depends a lot on what’s going on now and being able to predict the future.  You do have a child now, and for the child’s sake, you want to make sure that he doesn’t have to support you during your golden years.  At the same time, babies are a lot of work and you may have more time and more money to devote when the baby is school-age.  A lot of things change over time.

As a side-note, when your salary is *truly* small, because you’re one of the “47%,” Social Security will replace a large percentage of your income.  And, correlation-wise, you’ll die younger.  But that’s not really your situation.

Yes, not wanting to figure out your bank’s IRA thing is lame.  Don’t use your bank for the Roth IRA (unless the only way you are going to do an IRA is through the bank, but that would only be the case if the bank was super easy to use, satisficing is always better than doing nothing).  Give Vanguard a call and they’ll help you figure out what to do, assuming you have enough money to put away in a Roth IRA.  Stick it either in an S&P 500 index fund or in their Target-Date retirement fund.

So, um, take that advice for what it’s worth given your changed circumstances from when you asked it.  We can elaborate in the comments!

Grumpy Nation, anything to add?

21 Responses to “Ask the grumpies: How much to save when your salary is small?”

  1. Leah Says:

    ha, thanks! I should blog about that baby again one of these days. She gets more adorable by the day (especially this week with Halloween outfits each day).

    I figured out my bank’s interface. I bank with a well-known IRA provider, so there are great options. I actually went and researched this. I maxed out my Roth IRA last year and am on track to do so this year. My husband has maxed his out for several years. I even looked up some funds! I’m doing Index fund stuff.

    We actually started tracking saving & spending. We had some good pay raises this year, so I think we are, combined, doing about what I said in the question even with the adding baby spending. We are trying to dig deeper since our salaries are lowish, but we have no housing expenses, so those savings are mainly to save up for the someday house. We’re good about not touching savings — we’ve paid all the hospital bills with cash flow so far. Might need a tiny bit of savings to max out my Roth depending on the shell game I play with my HSA, but I’ll replace that once I get reimbursements, I think.

    Thinking of started a Vanguard 529, since my state does not have any advantages for 529s.

    Anyway, thanks for the input. Happy Friday!

    • nicoleandmaggie Says:

      If your state doesn’t have 529 advantages, we recommend Utah.

      In theory you’ll have housing expenses in retirement, so that’s an extra wrinkle in your % saved. Most people using heuristics are already accounting for their shelter expenses.

      • Leah Says:

        Well, the hope is to save enough $$ to pay for a house outright and have no mortgage. I know that’s not all of living expenses, but it’s something.

        That’s my issue with calculators — how do I know how much $$ I need for housing when I have no idea how much housing costs? I read about mortgage and utilities costs and am baffled how some people save any money. I don’t even think we’re particularly spendy people.

      • nicoleandmaggie Says:

        Some of your salary is getting paid via your subsidized housing– if they didn’t subsidize housing, they’d probably have to pay you more (on average) or get worse quality teachers!

      • Leah Says:

        I suppose I could look at my overall package and not just my cash salary. That also includes the dining hall stipend . . .

        Also, looking at the #s I had above — I’m pretty sure I’m now at 50% savings + retirement. I have 403(b) taken out, I save 50% or more of my take-home, and I’ve been doing my Roth IRA out of cash flow and not savings this year. So, I’m slowly inching up. I also have my 403(b) withholdings slowly increasing over time. Every 6 months or so, I go in and increase that $5-10 per paycheck. I figure every little bit helps.

      • nicoleandmaggie Says:

        Sounds like you’re on a good track!

  2. bogart Says:

    Hmmm. The one helpful point I was going to make is that if one is not funding a Roth but is funding an EF, one can put the EF in a (cash equivalents) Roth, since the principal will still be available for Es, but it sounds like Leah is way ahead of where that’s useful. Still, on the off chance someone else might want to know… . Comes with standard advice, of course, like, “Never use the Roth principal for anything that’s not a TRUE EMERGENCY!!!” and so forth.

    • Leah Says:

      I have considered the fact that a Roth can be used for a housing downpayment, tho I will be hesitant to raid retirement funds unless we wait to buy a house until we’re close to retirement and buy outright.

      • chacha1 Says:

        fwiw, that’s exactly what we’re doing. We’re lifelong renters and decided some time ago to not buy a house until we were ready to decide where we would be happy to retire. That turned out to be in a different place than we originally thought – we opted for low-cost wine country (yes that does exist!) vs coastal wine country – but we basically will move there when the retirement residence (which we’ll build) is ready to move in. Until then we will stay in the crowded, polluted, stinking big city where we can make dopey money.

  3. becca Says:

    I feel like the people writing about personal finance are probably mostly over the income limits for it, because I hear surprisingly little about the retirement savings tax credit. Seems to me that’s a minimal amount to save if you’re in the situation it can be applied to, regardless of what % of salary it works out to. But that’s probably a minimal amount to save, so not quite the question Leah was getting at.

    • Leah Says:

      There’s a tax credit for that? I had some years making very little money and would have loved a tax credit. I didn’t start saving in earnest until recently, but I did start a Roth IRA and put tiny amounts in even in years when I made $13k. Maybe I needed a traditional for the tax credit?

      • becca Says:

        Yep, wish someone had smacked me upside the head with it earlier. It’s not refundable, so some years it wouldn’t have helped me, but other years it would have. It uses a form 8880. My understanding is it can be used with the Roth- super tax efficient. http://www.irs.gov/uac/Get-Credit-for-Your-Retirement-Savings-Contributions

      • nicoleandmaggie Says:

        Ohhh, that!

        Yes, most people probably make too much money for that. I think I’ve only been to one talk about it and it basically said it didn’t change behavior. I don’t know much about it at all.

      • nicoleandmaggie Says:

        Yes, the traditional gives a tax credit. You can save more with a Roth, and given that most 401K are traditional (roths are only introduced recently), it makes sense for many people to go with the Roth now that the income limits no longer favor the traditional version for high earners.

      • Katherine Says:

        I clicked over to the link about this credit and I got all excited because we make less than the limit, but then I read the rest and we’re not eligible because we’re full time students. Hopefully by the time one of us is no longer a student we’ll be making too much to be eligible (and we’ll be able to save a lot more than we are now!)

  4. SP Says:

    Curious – how do you guys calculate your savings rates, gross or net? For retirement savings, clearly gross makes sense because it is (generally) pre-tax. But for cash savings, it seems unfair to myself to use gross, because so much is eaten by taxes. And when I use the cash savings, I don’t have to pay taxes, it is all mine, so it seems like net would make sense. The problem comes if I wanted to state my total savings rate – it is just WRONG to add two percentages that aren’t based on the same number!

    I realize that for cash savings, it doesn’t really matter, it is just a metric. But I’m wondering if there is a clean way to do this that doesn’t violate math.

    • nicoleandmaggie Says:

      The 10-20% heuristic is generally gross for retirement savings only. But is still just a heuristic– to be honest, when I do ours, I round our salaries to a nice round number. It’s also not something I calculate all that often, since the retirement part is on auto-pilot.

      The rest of our savings is what’s leftover from what we don’t spend rather than being part of an early retirement goal. I only calculate it occasionally and I do it with lots of rounding.

      Cash savings is often being put towards a shorter term spending goal, so is it really saving?

      For cash saving it probably also depends what kind of system you’re using. I’m not sure that the 50/30/20 Elizabeth Warren thing gets into that fine of detail. The financial independence stuff probably does get into that fine of detail– I’m sure the answer is somewhere on the ERE or MMM blog/forum. I bet they use gross because they’re risk averse.

      I don’t think it matters what your actual total percent number is unless you’re trying to compare it to something else. Presumably keeping it all in gross is mathematically nice, especially since you know what % of that is going to taxes as well (though of course, that has to be calculated too because marginal tax rates aren’t average tax rates).

      • SP Says:

        Yeah, it makes sense. I was wandering if I can arbitrarily claim (to myself) that we save over half our income. I guess I’m the only one that I have to convince one way or another, in that case.

        I’d also just like to have a useful metric, my personal finance health summed up into a single number so I can have a gut feeling that I’m being conservative and safe with our finances. It serves no real utility, but it is easier than thinking about all of the details of mid and long term needs. (I really like that there are all of these heuristics for retirement savings percentages, because thinking about how much I need to save this year in oder to be able to retire at some time in the future is much more complex than just comparing my savings to those rules of thumb.)

      • nicoleandmaggie Says:

        Some people like net worth…

      • Leah Says:

        I use net to calculate our savings rate. Mostly, I do this because I’m using mental math, and I know how much I save versus my paycheck. I suppose I should say that I save 50% of what’s left over after my HSA, 403(b), and taxes.

        But I mostly do that for a mentally tally. I’m more concerned about how much we are actually saving and what that can get us. We’re saving for vacations, a down payment on a house (at some point), and a new car, so we have big goals. Thus, it’s most important to me to maximize the dollar amount.

        I also find the % helpful to remind myself that we’re doing the best we can. I have, in the past, been so obsessive about savings that I was making myself sick. This was when I was single and on my own. I actually had to set a goal for fun money spending or else I’d not spend much of anything (to my detriment).

    • Rosa Says:

      i’ve always used gross just because the main part of it was 401k contributions that I’ve always set as a % of the gross with my employer as part of initial payroll setup.


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