Most retirement advice is written for people who make six figures or more. But what about the middle-class families earning $50,000 to $100,000 who make up the backbone of America? They need a different approach — one that works with real-world constraints and modest incomes.
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The traditional retirement advice may not fit when you’re juggling a mortgage, kids’ expenses and student loans while trying to save for the future. Here’s a retirement plan that can actually work for middle-class families, based on what successful retirees have done.
Start With the 15% Goal, but Get There Gradually
Financial experts recommend saving 15% of your income for retirement, but telling a family struggling to pay bills to immediately save 15% is unrealistic. Instead, start small and build up over time.
Begin with whatever your employer matches in your 401(k). If your employer matches 3%, contribute 3% to get the free money. Then increase your contribution by 1 percentage point each year until you reach 15%.
A 30-year-old starting at 3% and increasing by 1 percentage point annually will hit 15% by age 42. Even starting at 5% and increasing by 1 percentage point every other year gets you to 15% before age 50.
This gradual approach lets your lifestyle adjust slowly rather than shocking your budget with a massive reduction in take-home pay.
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Use Both Traditional and Roth Accounts
Middle-class families benefit from tax diversification more than anyone else. You don’t know whether you’ll be in a higher or lower tax bracket in retirement, so hedge your bets.
Put enough in your traditional 401(k) to get the full employer match. Then open a Roth IRA for additional contributions. If you can afford to save more, go back to increasing your 401(k) contributions.
This strategy gives you flexibility in retirement. You can pull from traditional accounts to fill up lower tax brackets and then use Roth withdrawals to avoid pushing yourself into higher tax rates.
Focus On Low-Cost Index Funds
Middle-class investors can’t afford to lose money to high fees. A 1% annual fee might sound small, but it can cost you hundreds of thousands over a 30-year career.
Stick to broad market index funds with expense ratios under 0.2%. Target-date funds could be perfect for hands-off investors who want professional management without high costs.
Plan for Healthcare Costs
Healthcare is often the biggest surprise expense in retirement. Medicare doesn’t cover everything, and premiums can eat up a significant portion of a middle-class retirement budget.
Factor healthcare costs into your retirement income needs. A healthy 65-year-old couple should likely budget at least $300,000 for healthcare costs throughout retirement. That’s separate from your regular living expenses.
Consider opening a health savings account (HSA) if you’re eligible. HSAs offer triple tax benefits: deductible contributions, tax-free growth and tax-free withdrawals for medical expenses. After age 65, you can withdraw money for any purpose and pay only regular income tax.
Don’t Ignore Social Security
Social Security replaces about 40% of pre-retirement income on average, per Vanguard. That’s a bigger percentage than higher earners receive, making it a more important part of your retirement plan.
Claiming strategies matter more for middle-class retirees because Social Security represents a larger portion of their retirement income. According to Kiplinger, delaying benefits from full retirement age to age 70 will increase your monthly check by about 8% per year.
For a middle-class retiree, that could mean the difference between financial stress and comfortable retirement.
Keep Housing Costs Under Control
Your biggest expense in retirement will likely be housing. Many retirees find that even a paid-off house can be expensive to maintain, heat and cool.
Consider your long-term housing needs when planning for retirement. A large family home might not make sense on a fixed income, especially if you’re facing expensive repairs or high property taxes.
Some retirees benefit from downsizing to a smaller home or moving to a lower-cost area. Others prefer aging in place and budgeting for home maintenance and modifications. It’s all about carefully considering your options and making the decision that’s right for you (and then planning for it).
Build Multiple Income Streams
Middle-class retirees often need more than just retirement accounts and Social Security. Consider building additional income sources during your working years.
Rental property can provide steady income if you’re comfortable being a landlord. Small business ownership or freelance work in your area of expertise can continue into retirement.
Even simple strategies like dividend-focused investing can create additional income streams. The key is starting early and building these income sources gradually.
Plan for Different Retirement Phases
Retirement isn’t one long vacation. Most retirees go through distinct phases with different spending patterns and needs.
Early retirement (60s to early 70s) often involves higher spending on travel and activities. Many people are still healthy and want to enjoy their freedom. Middle retirement (70s to early 80s) typically sees reduced spending as people slow down but face higher healthcare costs. Late retirement (80s and beyond) often involves significant healthcare expenses and possibly long-term care costs.
Budget for these different phases rather than assuming your expenses will stay constant throughout retirement.
When To Get Professional Help
Middle-class families can handle basic retirement planning themselves using target-date funds and simple strategies. But consider getting professional help if you have complex situations like self-employment income with irregular earnings, pension benefits that need to be integrated with retirement income, major assets (outside of retirement accounts) and any big (read: costly) health issues.
Fee-only financial advisors can provide objective advice without trying to sell you expensive investment products.
Making It Work on a Middle-Class Income
The biggest challenge for middle-class retirement planning is balancing current needs with future security. You can’t sacrifice your family’s current well-being for retirement, but you also can’t ignore the future.
In short, start today. Even modest amounts saved regularly can grow into substantial retirement funds over 30 to 40 years thanks to compound interest.
Start where you are, increase your savings gradually and focus on the basics. That approach has worked for millions of middle-class retirees, and it can work for you too.
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This article originally appeared on GOBankingRates.com: The Retirement Plan That Can Actually Work for Middle-Class Retirees
