Updated on 12.21.09

Retirement Planning for a Low-Income Career

Trent Hamm

Several people in my close inner circle of friends and family have made the active choice to go into careers where they will be earning a low income for life. Their calling is in areas of social work and they’ve made the financially difficult choice to follow their heart. That earns a lot of respect from me.

Of course, when you step back from that decision and look at the course of one’s life, many normal financial choices become much more difficult. Many low-paying careers do not offer the same benefits as other careers – there simply isn’t the money available.

So how does a person in a low income career path save for retirement?

First of all, most low income people will have to plan for their own retirement beyond Social Security. Although some non-profits do offer 403(b) and other such retirement plans, many offer nothing of the kind and expect the employees to figure out their own path.

The best option for most people in such a situation is a Roth IRA, which is paid for with after-tax money. Since you’re already earning a pretty low wage, the tax advantages of 401(k)s and 403(b)s are less important.

Roth IRAs are pretty simple to understand. A Roth IRA is an investment account in which you can contribute as you wish throughout the year up to an annual limit (currently $5,000 if you’re below age 49). Once the money is in the account, you can choose to invest that money in whatever options the company managing the IRA has available to you – you can keep it in cash, buy bonds or stocks, or put it in index funds that allow you to own a little bit of everything. Any income you earn from these investments stays in the account and, when you reach age 59 1/2, you can withdraw that income without any taxes or any penalty at all. You can also withdraw the money you contributed at any time, but you can’t put it back into the account to replace it – once it’s gone, it’s gone.

A Roth IRA is pretty simple to open. Most investment firms offer Roth IRA plans of some sort. I use Vanguard for my own Roth IRA and I’ve been very happy with them and the investment choices they offer, but your mileage may vary.

I encourage anyone in a low-income career without a retirement plan to open a Roth IRA for themselves and contribute what they can on a regular basis. The easiest way to do that is to set up an automatic investment plan that withdraws a small amount from your checking account every week. Even $20 a week adds up to $1,040 over the course of a year, which is a good step in the right direction.

A second factor to note is that by choosing a low-income career, you’ll learn how to live on a low income. This means that your retirement needs will be much lower than people who earn a much higher income than you. You don’t need to stress about having millions in retirement when you retire.

Of course, there’s an important catch here – financial independence. If you’ve embarked on such a career but haven’t become fully financially dependent yet, you’re currently living above your means. Move towards financial independence. Start today. If you’re still being supported by someone, direct that support into something distinct, like your student loan bills, and learn how to live off of what you actually make yourself.

Yes, it’s hard. Yes, it often means passing on things you’d like to have. However, there are many valuable lessons to be learned from that process. You’ll learn what’s truly important to you – and what really doesn’t matter too much. You’ll learn how to live frugally and understand quite well how to maximize a dollar. Those are lessons that will help you throughout your life, in more ways than just saving a dollar.

My last suggestion is one that’s good for everyone to follow: don’t let pride stand in your way. When people offer to help you, it’s because they want to help you, and you bring value into their life by accepting a helping hand sometimes. Don’t turn down a free meal from someone who appreciates the work you’re doing. Don’t turn away a friendly gentleman who is impressed with the work you’re doing and gives you $50 to help you out. Just don’t rely on these things – accept them as they come.

Pride is our natural enemy. It constantly causes us to make choices that put us in a worse place than before. It often causes more social negativity than social positivity. Never be too proud to accept someone’s genuine offer of help.

Here’s an example. In my early years, I knew several people who did missionary work for the Latter Day Saints. Even though I’m not a member of that church, I know that such work is long, hard, lonely, and often without reward. Today, I’ll often give a bag of cookies or a few dollars to such missionaries. Quite often, they’ll say no out of pride. Yet, I wouldn’t be offering if I did not genuinely want them to have what I gave them.

Good luck!

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  1. They may be trading a high income for a nice pension plan. And like you said, they learned to live frugally, and save as much as they can for the dream of a secure retirement lifestyle.

    John DeFlumeri Jr

  2. George says:

    If you have a low income, then odds are that a regular IRA is actually more tax efficient than a Roth. Mainly because one’s taxable income after retirement is likely to be less than during employment.

  3. Des says:

    One thing you don’t mention, but that is a great advantage to people in this situation: they can likely work longer. Though not all low income earners like their jobs, if one has chosen this path deliberately, it is likely they chose it because it is personally fulfilling.

    For me, I chose a job I dislike but that pays well and it’s 55 or bust! There’s no way I could do what I do into my 70s, that would just be too depressing. But if someone loves what they do, and knows they’re contributing to a greater cause (whether low-paid or not) they may not want out once they reach retirement age. Retirement may just be a backup for when they are no longer *able* to do the job they love so much.

    Those extra years of compounding are a HUGE advantage and can outweigh much of the disadvantage of a low income.

  4. karyn says:

    Another thing to consider is how these jobs affect your child(ren). My husband works for the school system and I’m at home. The benefits are that his job is secure (hopefully), his schedule is regular, and the job is relatively low stress. However, he takes a lower income which means less money for extra activities and for college.

  5. Ariel says:

    As a member of the LDS church, I can see where missionaries would be very uncomfortable accepting money. It isn’t just out of pride; there are a lot of social/cultural/psychological barriers to taking cash in that sort of situation. Cookies, though? There are few social barriers to taking cookies, especially if you offer to let them come in for a moment to eat. Just be clear that you aren’t interested in their message, or they might get the wrong idea. If they still refuse, that’s pride. My brother is a full-time missionary and it warms my heart to know that he might run into friendly strangers like you.

    Also, in the financial independence paragraph, I think you meant “dependence” to be “independence?” Otherwise, great post. People need to understand the implications for themselves and their families before they choose a “noble” career like social work, where the good feelings comprise most of the compensation.

  6. Noadi says:

    I’ve accepted that my choice to run my own little business is not going to make me rich. I’m okay with that, I’d rather be poorer and happy than make more and hate working for someone else. I’m only 27 so retirement sounds very far away but I know I have to get working on it. I plan to open an IRA soon, I’m still investigating which kind I want to open.

    It’s a bit hard trying to focus on these things at my age when none of my friends are, they either don’t care yet or they have 401ks through their job and don’t need to think about it.

  7. Robin Crickman says:

    The one big problem of choosing a low-income life
    is that health support is very expensive and it is
    unlikely that low-income workers can afford to save
    enough to purchase such care or even the disability
    or nursing home insurance that would supply it.
    That leaves low-income people the choice of doing
    without proper care in old age or giving up all
    their (and perhaps their spouse’s) assets to qualify for welfare. Medicare pays only for a
    fairly limited amount of nursing home care and
    a minimal amount of home health assistance.

  8. Debbie M says:

    One advantage social workers have is that they can easily remember what’s important. As a social work friend of mine once said about all our computer software friends–they don’t even know what an emergency is. A release deadline is just not the same kind of emergency as a guy standing on a window ledge.

    Also, social workers tend to work so many hours that they don’t have a lot of extra time to hang around in stores buying things.

    However, social work is not low stress–there are too many people who need help and not enough people to help them. Social workers tend to burn out, too, because some people’s problems are just so big.

    One important thing for social workers to do is to take care of their own health. I know of social workers who work 12-hour days, have no time for friends, and even have trouble finding time for lunch or to use the restroom.

  9. Bill says:

    The message lately is that you need to work for little money to be happy, I make 120k and love my job, never wanted to do anything else since I was 12. I doubt I could do anything else well.

  10. deRuiter says:

    There’s no reason a social worker can’t get a part time job a few nights a week or weekends and earn extra money. Dump all you’re allowed into a ROTH, open (in the ROTH) an account at a discount broker like TDAMeritrade, and buy some stock with part of the money every year and perhaps put a portion in a CD if you’ve ultra conservative.) IMPORTANT ALL YOUR STOCKS BE SET UP AS DRIPS: divident reinvestment program, so you get a little more stock without paying a commission every month or three months, the stocks grow! Let’s not assume that every low wage worker only has to work 40 hours a week. Get a part time job, increase your income. Social work sounds like it’s sedentary. A part time job a few nights a week waitressing, delivering pizzas, coaching at a gym, or dog walking or baby sitting would get the person free exercise plus extra cash. Where is it written you only work 40 hours a week?

  11. Shevy says:

    “Social work sounds like it’s sedentary.”

    *Sounds like* you have no idea what a Social Worker may be doing. My mother was a Social Worker. She drove hundreds of miles in rural areas interviewing and doing placements for adoptions. She helped teach childbirth classes for single mothers. She coached the aforementioned 14 and 15 year olds through labour when their own parents wouldn’t. She investigated child abuse & neglect, which is very emotional and stressful. At times during her career she supervised other social workers in several different towns, which also required driving long distances through mountainous regions in winter. I’m sure that after trying to cover her huge caseload and then writing up all her notes at night she would have *loved* to go out and waitress for minimum wage or walk dogs! (shakes head)

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