How to Save for Retirement When You Work Part Time

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For some 25 million Americans, part-time jobs may be all they can find or are a necessity to care for family, attend school or simply enjoy more free time than a full-time job allows. But does working part time make it harder to save for retirement? Not necessarily: More than two-thirds (67%) of part-time employees contribute to retirement plans, according to the October 2020 Transamerica Retirement Survey of Workers. If you work part time, you can still save for retirement, either through an employer-sponsored retirement plan or an account you set up on your own. Here's a closer look at retirement savings options for part-time workers.

Employer-Sponsored Retirement Plans

There are several types of retirement plans your employer may offer: 401(k) plans, SEP-IRAs and SIMPLE IRAs.

401(k)

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 expanded part-timers' access to employer-sponsored 401(k) retirement plans. Under the new law, employees who work at least 500 hours during a 12-month period for three years in a row will be eligible to contribute to their employer's 401(k) plan beginning in 2024. (Previously, employees had to work at least 1,000 hours during a 12-month period to participate.)

If you worked at least 1,000 hours for your employer in the past 12 months, you don't have to wait until 2024; you are eligible for their 401(k) plan now. Some companies offer part-timers other benefits too. For example, along with its 401(k) plan, Starbucks offers qualifying part-time employees health insurance, discounts on company stock, tuition assistance and more. Perks like these can free up cash you can then tuck away in your retirement account.

SEP-IRA

A Simplified Employee Pension (SEP) IRA is another type of retirement plan employers may offer. If you're 21 or older, have worked for your employer during at least three of the past five years, and received at least $650 in compensation for 2021 ($600 for 2019 and 2020), you're eligible to participate in your employer's SEP-IRA. Unlike a 401(k), you cannot contribute to a SEP-IRA yourself; instead, your employer contributes for you. There's no waiting period for the money in your account to vest; you own 100% of it right away.

SIMPLE IRA

Small employers (typically companies with 100 or fewer employees) may offer employees a SIMPLE IRA. You're eligible for your employer's SIMPLE IRA if you received at least $5,000 in compensation during any two years before the current calendar year and expect to earn at least $5,000 in the current calendar year. As with a SEP-IRA, your employer is required to contribute on your behalf. You can opt to contribute, but even if you don't, you're always fully vested in your account.

Individual Retirement Plans (IRAs)

If your employer doesn't offer a retirement plan, you can open an individual retirement account (IRA) through a bank, investment firm, mutual fund company or another financial institution. These accounts come in two flavors: traditional IRAs and Roth IRAs. Both are tax-advantaged retirement accounts, but differ in how they're taxed. Contributions to a traditional IRA are made tax-free but that means they'll be taxed when you make a withdrawal. Contributions to Roth IRAs are made using money that's already been taxed, and can be withdrawn tax-free once you're age 59½. For 2021, the maximum contribution to both types of IRAs is $6,000 ($7,000 if you're 50 or older).

Which type of IRA is better for you? If you're just starting out in the workforce and expect your tax rate to increase with your earning power, a Roth IRA lets you pay taxes on contributions at today's lower rate and withdraw money tax-free later, when your tax rate is higher.

Health Savings Accounts (HSAs)

Because aging is often unfortunately accompanied by health problems, medical care can be a substantial expense in retirement. Setting up a health savings account (HSA), a tax-advantaged account where you can save money to pay for certain medical expenses, can help. An HSA offers triple tax deductions: You can deduct your contributions on your federal income tax, earn tax-free interest or investment gains and withdraw money tax-free if it's used for qualified medical expenses. (You can't use an HSA to pay health insurance premiums, however.)

You must have a high-deductible health plan (HDHP) to open an HSA; for 2021, that's a plan with a minimum annual deductible of $1,400 for an individual or $2,800 for a family. You can open HSAs through banks, insurance companies or companies that manage IRAs.

How Much Money You Should Have Saved at Every Age

How much should you aim to put aside when saving for retirement? Investment company Fidelity advises building a nest egg that will replace at least 45% of your pre-retirement income. This assumes your expenses drop in retirement and that Social Security supplements a significant part of your income. The National Institute on Retirement estimates Security Social Security benefits only replace about 40% of pre-retirement income, so if you don't expect your expenses to decline significantly, you may want to save more. In fact, some experts suggest saving enough to replace 70% to 90% of your pre-retirement income.

Fidelity recommends putting 15% of your gross income into retirement accounts, half of which should be invested in stocks. Here's what Fidelity says you should have saved:

  • By age 30: the equivalent of your current annual salary
  • By age 40: three times your annual salary
  • By age 50: six times your annual salary
  • By age 60: eight times your annual salary
  • By age 67: 10 times your annual salary

These suggestions are only averages, however, and you may decide to save more or less than this depending on your current age and the lifestyle you want in retirement. If your vision of retirement involves puttering around in your workshop, gardening and visiting the grandkids, you won't need to save as much as someone who wants to travel the world or collect classic cars. Paying down credit card debt, reducing your expenses and making a budget can help you put more of your paycheck toward retirement.

Any Time Is a Good Time to Save for Retirement

The earlier you start setting aside money for retirement, the longer your money has to grow. No matter how old you are, consider putting some of your part-time paycheck into a retirement account so it can help grow your nest egg and ensure a comfortable old age.

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