How to Plan for Retirement: A Practical Guide Even on a Low Income

“Retirement? That’s only for people who earn well.” If you’ve ever thought this, know that this is one of the biggest myths about personal finance. The truth is that anyone can — and should — plan for retirement, regardless of their current salary.

In this guide, we’ll demystify retirement planning and show practical paths for you to start today, even if you’re earning little.

Why Think About Retirement Now (Even if You’re Young)

“I’m 25 years old, why should I worry about something that won’t happen for another 40 years?”

The answer lies in one word: time. Time is the most powerful ingredient in investments, and it only works in your favor if you start early.

The Miracle of Compound Interest

See the difference between starting at 25 versus 35 years old. Every example in this guide uses the same hypothetical assumption: a 10% annual return, compounded monthly (10% ÷ 12 per month), with each deposit made at the end of the month. It is an assumption for comparing scenarios, not a promised return.

Ana starts at 25:

• Invests $200/month until 65 (40 years)
• Total invested: $96,000
• Final value (at 10% per year): about $1,265,000

Bruno starts at 35:

• Invests $200/month until 65 (30 years)
• Total invested: $72,000
• Final value (at 10% per year): about $452,000

Ana invested only $24,000 more than Bruno, but ended up with about $813,000 more. That’s the power of time.

The Earlier You Start, the Less You Need to Save

*Hypothetical assumption: 10% per year, compounded monthly, deposits at the end of each month. Amounts rounded to the nearest $10.

The longer you wait, the more expensive it gets. Start with what you can, but start.

The Problem of Relying Only on Social Security

Many people believe that Social Security will guarantee a comfortable retirement. Unfortunately, the reality is quite different.

How Much Does Social Security Pay?

Your benefit is based on up to 35 years of your highest earnings, indexed to national wage growth (Social Security Administration, Social Security Benefit Amounts). In January 2026, the estimated average benefit for all retired workers was $2,071 per month, and the maximum for a worker retiring at full retirement age was $4,152 per month (Social Security Administration, 2026 Cost-of-Living Adjustment Fact Sheet, 2025).

• Full retirement age: 67 for anyone born in 1960 or later
• Claiming at 62: the benefit is reduced by about 30% for someone whose full retirement age is 67
• Waiting past full retirement age: delaying benefits up to age 70 increases the monthly amount (Social Security Administration, Starting Your Retirement Benefits Early)

The Problems with the System

1. Growing deficit: Fewer workers supporting more retirees
2. Rules can change: they have changed before; full retirement age is 66 for people born from 1943 to 1954 and 67 for those born in 1960 or later
3. Loss of living standard: Those who earn well won’t retire earning the same, since the benefit has a ceiling
4. Uncertainty: You don’t know what the rules will be in 30 years

Social Security as a Base, Not a Solution

Social Security should be seen as a floor, not your only source of retirement income. You need to build other sources.

How Much You Need to Retire

This is the million-dollar question — literally. Let’s simplify the calculation.

The 25x Method

A simple rule of thumb:

Required wealth = Desired monthly expense x 12 x 25

Example: If you want to live on $5,000/month in retirement:

• $5,000 x 12 = $60,000/year
• $60,000 x 25 = $1,500,000

Why 25 Times?

The number 25 comes from the so-called 4% rule (1 ÷ 4% = 25). It started with a study by William Bengen using US stock and bond returns since 1926: an initial withdrawal of 4% of the portfolio, then adjusted for inflation every year, never ran out in less than 33 years in any of the historical periods he tested (Bengen, Determining Withdrawal Rates Using Historical Data, Journal of Financial Planning, 1994). The Trinity Study reached a similar result: with inflation-adjusted 4% withdrawals, portfolios holding 50% to 100% stocks lasted 30 years in 95% to 98% of the periods between 1926 and 1995 (Cooley, Hubbard and Walz, Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable, AAII Journal, 1998).

• $1,500,000 x 4% = $60,000 in the first year ($5,000/month), then adjusted for inflation

Three caveats: the studies tested horizons of about 30 years, not “forever”; they rely on past US market returns, which may not repeat; and they ignore taxes and costs. Treat 25x as a starting point, not a guarantee.

Calculating for Your Reality

Step 1: Estimate how much you want to spend per month in retirement

• Remember: some expenses decrease (children, mortgages) and others increase (health, leisure)
• If you don’t know where to start, use 70% to 80% of current expenses as a working assumption and adjust item by item

Step 2: Multiply by 300 (12 months x 25)

Step 3: That’s your magic number

Seems Impossible? It’s Not.

A million seems like a lot, but remember: you have decades to get there, and compound interest does most of the work.

Private Pension Plans: Understanding Your Options

In the US, the main tax-advantaged retirement accounts are workplace plans, such as the 401(k), and individual retirement accounts (IRAs). For 2026, you can put up to $24,500 into a 401(k), plus up to $8,000 in catch-up contributions if you are 50 or older, and up to $7,500 into an IRA, plus $1,100 if you are 50 or older (IRS, 401(k) limit increases to $24,500 for 2026, IRA limit increases to $7,500, 2025).

Tax-Deferred Plans

How they work: In a traditional 401(k), contributions come out of your paycheck before income tax, which lowers your taxable income now. Traditional IRA contributions may also be deductible, but the deduction may be limited if you or your spouse have a retirement plan at work and your income is above certain levels (IRS, Retirement topics: IRA contribution limits).

Who they’re for:

• Those who pay federal income tax today
• Those who expect a lower tax rate in retirement
• Those who can invest the tax savings

Example (hypothetical, single filer, 2026):

• Salary: $100,000
• After the $16,100 standard deduction, taxable income is $83,900, which falls in the 22% federal bracket (IRS, IRS releases tax inflation adjustments for tax year 2026, 2025)
• Traditional 401(k) contribution: $12,000, which lowers taxable income to $71,900, still in the 22% bracket
• Federal income tax savings: $12,000 x 22% = $2,640 (state taxes not included)

Catch: When you withdraw, you pay income tax on the total amount (contributions + earnings).

After-Tax Plans

How they work: Roth 401(k) and Roth IRA contributions are made with money that has already been taxed, so there is no deduction now. In exchange, qualified withdrawals, contributions and earnings alike, are tax-free; in general, a withdrawal qualifies after a five-year period and once you reach age 59½ (IRS, Retirement plans FAQs on designated Roth accounts).

Who they’re for:

• Those in a low tax bracket today
• Those who expect a higher tax rate in retirement
• Those who want tax-free income later

Comparative Table

Choosing Your Tax Treatment

The real choice is between paying tax now or later:

Traditional (tax-deferred):

• You save tax at today’s rate
• Usually better if you expect a lower tax rate in retirement

Roth (after-tax):

• You pay tax at today’s rate, and qualified withdrawals come out tax-free
• Usually better if you expect the same or a higher tax rate in retirement

Tip: If you can’t tell which rate will be higher, splitting contributions between the two spreads the risk.

When Private Pension Plans Are Worth It (and When They’re Not)

Private pension plans aren’t automatically the best option. Here’s when they make sense:

Worth It When:

1. You pay federal income tax today: The traditional plan’s tax break is real and significant

2. You lack discipline: The money is harder to reach; withdrawals before age 59½ generally owe a 10% additional tax on top of income tax, unless an exception applies (IRS, Retirement topics: Exceptions to tax on early distributions)

3. You want simplicity: With a 401(k), contributions come straight out of your paycheck

4. Your employer matches contributions: Some employers add money when you contribute; if yours does, contributing enough to get the full match is part of your pay. Check your plan’s rules

Not Worth It When:

1. Fees are too high: Fund expenses above 1% per year eat into your returns

2. Your tax rate is very low today: A traditional deduction is worth little, and a Roth account may fit better

3. You need the money before age 59½: Early withdrawals generally owe income tax plus the 10% additional tax

4. You have discipline to invest on your own: You can build a more efficient portfolio

Fees Are the Villain

Retirement plans and funds can charge:

• Plan administration fees
• Investment fees on each fund, shown as the expense ratio
• Sales charges on some funds and annuities

Check your plan’s fee disclosure and each fund’s prospectus before choosing.

Example of fee impact (same monthly compounding assumption):

A 2% fee cost $385,000 over 30 years!

Rule: Prefer funds with expense ratios well below 1% per year.

Alternatives to Private Pension Plans

If private pension plans don’t make sense for you, there are other excellent options:

Inflation-Protected Bonds

In the US, Treasury Inflation-Protected Securities (TIPS) have a principal that goes up with inflation and pay a fixed rate of interest on that adjusted principal (TreasuryDirect, TIPS).

Why they’re great for retirement:

• Protects your money from inflation
• Fixed rate guaranteed until maturity
• No management fees
• Liquidity (can sell early, but with market risk)

How they work:

• Example (hypothetical): a TIPS paying a fixed 2% per year above inflation
• You receive the value adjusted for inflation plus interest

Example (hypothetical):

• Investment: $10,000
• Term: 20 years
• Return: inflation of 3% per year (assumption) + 2% per year, about 5.1% per year (1.03 x 1.02)
• Final value: about $26,800 in nominal dollars, or about $14,900 in today’s dollars, before taxes

Investment Funds

Actively managed stock and balanced funds can be options for those who accept more risk in exchange for more return.

Advantages:

• Professional management
• Automatic diversification
• Various strategies available

Cautions:

• Management fees (look for below 1%)
• Sales charges (loads) on some funds; check the prospectus
• Volatility (value goes up and down)

ETFs (Index Funds)

ETFs are funds that replicate indices, like the S&P 500 or total market indices.

Examples:

• Total Market ETFs: Replicate the entire stock market
• S&P 500 ETFs: Replicate the 500 largest US companies
• International ETFs: Replicate global markets

Advantages:

• Costs concentrated in the fund’s expense ratio, shown in the prospectus
• Instant diversification
• Easy to buy (like a stock)

For retirement: Broad index ETFs are excellent for the long term.

REITs (Real Estate Investment Trusts)

REITs are funds that invest in real estate and distribute rental income.

Advantages:

• Regular dividend income (check how it is taxed in your type of account)
• Real estate exposure without buying property
• Liquidity (buy and sell on the exchange)

For retirement: Can supplement income in the withdrawal phase.

Comparative Table

Only TIPS held to maturity have a return known at purchase (inflation + fixed rate, before taxes). For the other options, returns vary and nothing is guaranteed.

How Much to Invest Monthly for Each Goal

Let’s be practical. How much do you need to save per month?

Simple Calculator

The table below uses the same hypothetical assumption as the rest of this guide: 10% per year, compounded monthly, deposits at the end of each month.

Examples:

For other amounts, the exact formula is: contribution = goal x i ÷ [(1 + i)ⁿ − 1], where i is the monthly rate and n is the number of months.

Strategy for Those Earning Little

1. Start with 5% of salary: If you earn $2,000, that’s $100/month
2. Increase 1% with each raise: Got a 10% raise? Save 6% instead of 5%
3. Use extra money: Bonuses, tax refunds, windfalls → straight to retirement
4. Automate: Schedule automatic transfer on payday

The Absolute Minimum

If you really can’t save almost anything, start with $50/month. It seems little, but:

• $50/month for 40 years (at 10% p.a.) = $316,000

It’s better than zero. And as your income increases, you increase the contribution.

The Power of Time: Starting at 25 vs 40

Let’s make a detailed comparison so you understand the real impact of starting early.

Scenario 1: Carlos, 25 Years Old

• Salary: $3,000
• Saves: 10% = $300/month
• Invests until 65 (40 years)
• Return: 10% per year

Result at 65:

• Total invested: $144,000
• Accumulated value: $1,897,000
• Earnings: $1,753,000 (92% of total!)

Scenario 2: Marta, 40 Years Old

• Salary: $5,000 (got promotions)
• Saves: 15% = $750/month (more than double Carlos)
• Invests until 65 (25 years)
• Return: 10% per year

Result at 65:

• Total invested: $225,000
• Accumulated value: $995,000
• Earnings: $770,000 (77% of total)

The Result

Carlos invested $81,000 less than Marta, but accumulated $902,000 more.

Why? Because Carlos’s money had 15 more years to grow.

Lesson

Don’t wait to earn more to start. Start now with what you have.

Reviewing the Plan Periodically

Planning for retirement isn’t something you do once and forget. You need to review periodically.

When to Review

1. Annually: Check if you’re on track
2. With each income change: Adjust contribution proportionally
3. With each life change: Marriage, children, divorce
4. Every 5 years: Reevaluate investment strategy

What to Review

• Accumulated value: Is it at the planned pace?
• Monthly contribution: Can you increase it?
• Allocation: Too conservative? Too risky?
• Fees: Found cheaper options?
• Goal: Have your retirement plans changed?

Rebalancing

As you age, your portfolio should become more conservative:

Rule of thumb: Your age in fixed income, the rest in variable income.

• 30 years: 30% fixed income, 70% variable income
• 50 years: 50% fixed income, 50% variable income

Common Mistakes in Retirement Planning

Avoid these traps:

1. Postponing the Start

“I’ll start when I earn more” — and that day never comes.

2. Relying Only on Social Security

Social Security is a supplement, not the complete solution.

3. Choosing Expensive Private Pension Plans

Fees above 1% per year destroy your wealth in the long term.

4. Not Diversifying

Putting everything in one investment is risky.

5. Withdrawing Before Time

Using retirement money for emergencies destroys the plan.

6. Not Adjusting Over Time

Circumstances change. Your plan should change too.

How Monely Can Help

Monely offers tools to help you track your progress toward retirement:

Long-Term Financial Goals

Create a specific goal for retirement:

• Define the total desired amount
• Track progress month by month
• See how much is left and when you’ll reach it

Recurring Transactions

Set up your monthly contribution as a recurring transaction:

• Never forget to invest
• Track if you’re following the plan
• See contribution history

Progress Charts

Visualize your wealth growth over time:

• See the growth curve
• Compare with the goal
• Identify months when you couldn’t contribute

Investment Categorization

Create categories for different types of investments:

• Private pension
• Government bonds
• Stocks and ETFs
• REITs

This way you know exactly how your retirement portfolio is distributed.

Conclusion

Planning for retirement may seem distant and complicated, but it’s not. The most important thing is to start — even with small amounts.

Summary of key lessons:

1. Start now: Time is your greatest ally. The sooner you start, the less you’ll need to save
2. Don’t rely only on Social Security: Build your own income sources
3. Calculate how much you need: Use the 25x rule to have a clear goal
4. Choose your investments wisely: Avoid high fees. Inflation bonds and ETFs are great options
5. Automate: Set up automatic contributions so you don’t depend on willpower
6. Review periodically: Adjust the plan as your life changes

Remember: you don’t need to be rich to have a peaceful retirement. You just need to be consistent for many years.

Your future self will thank you for every dollar you save today.

Next steps: Download Monely and create your retirement goal today. Start tracking your contributions and watch your wealth grow over time.