The biggest mistakes lower-income workers make are starting too late, cashing out early, and not using the tax breaks available to them

If you earn less than $50,000 a year, retirement planning feels like a luxury you cannot afford. But the mistakes that cost lower-income workers the most are not about having too little money — they are about how you handle the money you do have. Cashing out a retirement account early, missing tax credits you may have access to for, or waiting until 65 to start saving can each cost you tens of thousands of dollars over your lifetime.

The difference between a lower-income worker and a higher-income one is not just the size of the paycheck. It is that every dollar you save or lose hits harder. A $5,000 mistake at age 35 costs you far more than it costs someone earning six figures, because you have less time to recover and less money to absorb the loss.

Key Takeaways

  • Cashing out a retirement account before age 59½ triggers a 10 percent penalty plus income tax, often taking 30 to 40 percent of the withdrawal.
  • The Saver's Credit (Retirement Savings Contributions Credit) returns money to your tax refund if you save for retirement and earn under $68,250, but most lower-income workers do not know it exists.
  • Waiting until you have "enough" to start saving means missing decades of compound growth, even on small amounts like $50 per month.
  • Social Security replaces a higher percentage of income for lower-wage workers, so claiming at 62 instead of 70 costs you less in lifetime benefits than it costs higher earners.
  • Employer 401(k) matches are assistance programs that disappears if you do not contribute — even 1 percent of your salary is worth taking.

Cashing out retirement savings early and paying the penalty

The most expensive mistake is withdrawing from a 401(k) or IRA before age 59½. The IRS charges a 10 percent penalty on top of income tax. If you withdraw $5,000 at age 45, you might owe $1,500 to $2,000 in taxes and penalties combined — leaving you with $3,000 to $3,500 of the original amount.

Lower-income workers cash out early more often because emergencies feel more urgent when you have no savings cushion. A car breaks down, a medical bill arrives, or you lose a job. The retirement account looks like the only option. But that one withdrawal can cost you $15,000 or $20,000 in lost growth by age 65, because the money you took out would have been earning returns for 15 or 20 years.

Before you withdraw, ask your plan administrator about a loan instead. Many 401(k) plans let you borrow against your balance at a low interest rate, and you pay yourself back — not the IRS. If your plan does not offer loans, some plans allow hardship withdrawals without the 10 percent penalty if you can prove financial hardship, though you still owe income tax. A financial counselor at a nonprofit credit counseling agency (find one through the National Foundation for Credit Counseling) can help you explore other options before you touch retirement money.

Not claiming the Saver's Credit on your tax return

The Retirement Savings Contributions Credit, also called the Saver's Credit, is a tax credit that returns money to you if you save for retirement and earn under $68,250 (the limit changes yearly). If you contribute $2,000 to an IRA or 401(k) and earn $35,000, the credit can return $200 to $1,000 of that to your tax refund — essentially the government matching part of your savings.

Most lower-income workers do not claim it because they do not know it exists. The credit is not advertised the way the Earned Income Tax Credit is. You have to find it yourself on Form 8880 when you file taxes, or tell a tax preparer to look for it. If you use a free tax preparation service (VITA sites offer free filing for households earning under $60,000), ask the preparer specifically whether you may have access to for the Saver's Credit.

The credit phases out as your income rises. At $35,000, you might get back 50 percent of what you contributed. At $50,000, you might get back 20 percent. At $68,250, you get nothing. But in that middle range, it is real money — sometimes $1,000 or more per year if you save consistently. Over 10 years, that is $10,000 you left on the table by not claiming it.

Waiting until you have enough money to start saving

A common belief is that retirement saving only matters if you can put away $200 or $300 per month. If you can only save $50, the thinking goes, why bother. This is backwards. The person who saves $50 a month starting at age 30 ends up with far more at 65 than the person who waits until age 40 to save $200 a month, because time matters more than the amount.

If you save $50 per month from age 30 to 65 at an average return of 6 percent per year, you end up with roughly $90,000. If you wait until age 40 and save $200 per month until 65, you end up with roughly $75,000. The person who started earlier with less money ends up ahead. Starting early also builds the habit. After a few years of saving $50, you often find you can increase it to $75 or $100 without noticing.

If your employer offers a 401(k), contribute at least 1 percent of your salary. That is usually $100 to $200 per year for a lower-income worker. If your employer matches contributions (many do, even for lower-wage workers), you are leaving assistance programs on the table by not contributing. The match is not taxed as income, and it grows tax-free until you withdraw it.

Ignoring the difference between Social Security and retirement savings

Social Security is not the same as retirement savings, but for lower-income workers, it replaces a much larger share of your income than it does for higher earners. If you earned $30,000 per year, Social Security might replace 50 to 60 percent of that income. If you earned $100,000, it might replace 30 to 40 percent. This means the decision about when to claim Social Security matters differently for you.

Claiming at 62 instead of waiting until 70 costs you less in lifetime benefits than it costs a higher earner, because you have fewer years of retirement ahead and a smaller benefit to begin with. If you need the money now and your health is uncertain, claiming early can be the right choice. But if you are healthy and can wait, each year you delay increases your monthly benefit by about 8 percent. At 70, your benefit is roughly 75 percent higher than at 62.

The break-even point — where waiting longer pays off — is usually around age 80 to 82. If you think you will live past 82, waiting pays. If you are not sure, a financial counselor can help you run the numbers based on your health and family history. Do not let anyone pressure you to claim early or late. The choice is yours, and it should match your situation.

Overlooking employer matches and low-cost savings options

Many lower-income workers do not contribute to an employer 401(k) because they think they cannot afford to. But if your employer matches contributions, you are turning down assistance programs. A typical match is 50 cents on the dollar up to 3 percent of your salary. If you earn $30,000 and contribute 3 percent ($900 per year), your employer adds $450. That is a 50 percent return on your money before it even grows.

If your employer does not offer a 401(k), you can open an IRA (Individual Retirement Account) on your own. A traditional IRA lets you deduct contributions from your taxes, lowering what you owe. A Roth IRA lets you withdraw money tax-free in retirement. For 2024, you can contribute up to $7,000 per year to either type (the limit changes yearly). You can open an IRA at any bank, credit union, or brokerage — many charge no fees for accounts under $1,000.

If even an IRA feels out of reach, some states and cities now offer automatic IRA programs for workers whose employers do not offer retirement plans. These are set up so a small amount (often $50 to $100 per month) is automatically moved from your paycheck into an IRA. You can change the amount or stop it anytime. Check whether your state offers this through your state's treasurer or labor department website.

Not planning for healthcare costs before Medicare kicks in

If you retire before age 65, you lose employer health insurance but do not yet may have access to for Medicare. The gap between retirement and 65 is expensive. A lower-income worker might assume they will just go without insurance, but a single hospital stay can wipe out years of savings.

The Affordable Care Act lets you buy health insurance on the marketplace even if you are not working. If your retirement income is low enough, you may may have access to for subsidies that make the premium affordable. You can also stay on your employer's plan through COBRA for up to 18 months after you leave, though you pay the full premium plus a small fee — usually $400 to $800 per month for individual coverage.

If you plan to retire before 65, budget for healthcare. Set aside money in a Health Savings Account (HSA) if your employer offers a high-deductible health plan — contributions are tax-deductible, and withdrawals for medical expenses are tax-free. Even $100 per month set aside for healthcare costs between retirement and Medicare can prevent a crisis.

Frequently Asked Questions

Can I withdraw from my 401(k) without a penalty if I am laid off?

If you are laid off or fired in the year you turn 55 or later, you can withdraw from your 401(k) without the 10 percent penalty (though you still owe income tax). This is called the Rule of 55. If you are younger than 55, you cannot use this rule. An IRA has different rules — you can withdraw without penalty at any age if you set up a series of "substantially equal periodic payments" based on your life expectancy, but this is complex and requires professional help.

What happens to my retirement savings if I change jobs?

Your 401(k) stays in the account even after you leave. You can leave it there, roll it into your new employer's plan (if they allow it), or roll it into an IRA. Do not cash it out — the penalty and taxes will cost you 30 to 40 percent of the balance. A rollover to an IRA usually takes two weeks and costs nothing.

Is it too late to start saving for retirement if I am 50?

No. People over 50 can contribute an extra $7,500 per year to a 401(k) and an extra $1,000 per year to an IRA (catch-up contributions). If you have 15 years until retirement, saving $500 per month can grow to $100,000 or more. Start now rather than waiting for the "right" time.

Should I pay off debt or save for retirement first?

If your employer offers a 401(k) match, contribute enough to get the full match first — that is assistance programs. Then pay down high-interest debt like credit cards. After that, split money between additional retirement savings and debt payoff. A financial counselor can help you build a plan that does both.

What if I have no income some years — can I still save for retirement?

You can only contribute to an IRA if you have earned income that year. If you have no income, you cannot contribute. But if you are married and your spouse works, your spouse can contribute to a spousal IRA in your name using their income. This lets you both save even if one of you is not working.