I know it is extremely difficult to get by making minimum wage, or even twice minimum wage. Its become a lot harder with Obamacare regulations as well. I hear from people all the time with incomes ranging from $10K a year to $100K a year that its too hard to save money for retirement. I like playing around with numbers and in an “ideal” situation someone earning minimum wage can indeed retire a minimum wage millionaire.
In this scenario the minimum wage worker is employed at a company like Wal-Mart that offers a generous $1 for $1 401K match to 6%. YMMV, many low wage workers are not covered by an employer plan at all, while others, like those at McDonald’s get a much more generous match. Another catch is with Obamacare mandates fewer low wage workers are able to work 40 hours, with employers limiting them to 25 – 30 hours per week.
Minimum Wage Millionaire Savings Data:
- Yearly Income at 40 hours per week: $15,392
- 6% 401K Contribution: $923.50
- 6% 401K Match: $923.50
- 4% Roth IRA contribution: $615.50
Taxes As a Single Person:
- Income: $15,392
- Standard Deduction $6,200
- Exemption: $3,950
- 401K Deduction: $923
- Taxable Income: $4,310
- Tax: $431
- Retirement Savers Tax Credit: $769.50 (non refundable)
- Tax: $0
Our worker saved 10% of his own money, or $1,531. He then received a 10% tax break on his 401K contribution worth $92.30 because he is in the 10% tax bracket. With his Adjusted Gross Income below $18,000 retirement savings of up to $2,000 result in a non refundable Retirement Savers Tax Credit of 50%. Since this credit is non refundable it is only worth $431 instead of the maximum $769.50 based on 50% of his $1,539 in contributions. After these tax incentives his total savings out of pocket was only $1,007, or roughly $20 a week.
Assuming an 8% long term return on stock market index funds and a 45 year time horizon from age 20 to age 65 we can do the following calculations. With the employer match the total amount of money invested per year is $2,462. Over the course of 45 years at 8% returns this amounts to $1,027,869. What’s even better is that this money is split between both traditional and Roth funds. Roughly 25% of the money is in Roth accounts. Using a 4% withdrawal rate our minimum wage millionaire can now take out $30,000 a year in taxable income and $10,000 a year from his Roth. Starting early, and saving 10% of your income, should be enough to ensure a comfortable retirement.
Saving Money on Minimum Wage
The hard part of course is saving ANY money in this situation. It’s all well and good that for investing $1,500 he gets a $1,000 employer match and a $531 Uncle Sam credit essentially doubling his contribution, but coming up with any money to save is really difficult in this situation. First, by adjusting his IRS with holdings on his taxes our minimum wage millionaire is able to make $523 of his contribution without touching his wallet. Nothing in his budget has to change. Now all he has to do is find an extra $20 a week. When Mrs. C. and I moved in with each other splitting the expenses made it so we could both save money. Getting a roommate may be a possible solution, or earning $1,000 a year on a side venture. In the above situation the worker could earn another $2,600 and still not owe any federal income tax.
Of course it is unlikely that someone will stay at minimum wage for his entire working life. As income increases the value of the employer match will increase and tax credits will decreased. It is possible to save money for retirement while making minimum wage. It isn’t how much you make, it’s how much you keep. Someone that can find a way to save 10% of income while working minimum wage will have no problem saving 20% – 30% of income when he makes closer to the national median wage.
I know this is an extreme example, but this should help to show that even when saving relatively small amounts of money, with a long enough time horizon, retirement is possible.