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How should I plan for my retirement if my employer doesn't offer retirement benefits?

Feb 08, 2013 by erik from Englewood, CO in  |  Flag
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27 votes

In many cases, your first step should be to open an IRA and contribute as much as possible each year. Earnings grow tax-deferred and offer long-term growth opportunities similar to that of employer-sponsored retirement plans. In addition, you might qualify for tax-deductible contributions.

Another option, depending on your situation, may be to open a Roth IRA. Roth IRAs use after tax dollars and the investments grow tax-free. This may change with future legislation, but for now this is a worthwhile option to consider for younger investors.

Comment   |  Flag   |  Feb 08, 2013 from Denver, CO

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13 votes

Erik - Congratulations for taking your retirement into your own hands and not being deterred by the fact that your employer is not helping for your retirement. You can save up to $5,500 through an individual retirement account (IRA) for 2013, an increase of $500 over last year. I would suggest setting up a brokerage account and monthly automatically depositing $450 into the IRA account (if you can afford to max out). In addition, if you are married your wife can also contribute up to $5,500 into her own separate IRA account. If possible, the $11,000 combined will get your retirement savings started in a big way. Even if you cannot save the maximum, save as much as you can. Your 85 year self will thank you!

Comment   |  Flag   |  Feb 08, 2013 from Allendale, NJ

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With a Traditional and Roth IRA, you can still contribute for the 2012 tax year through 4/15/2013. Limits are $5k in '12 and as stated above, $5.5k in '13. If married and have the cash, that is $21k now!

If you use a traditional, you have higher income thresholds to retain deductibility (unlimited if single or married and spouse also doesn't have employer plan) but it gets nuanced if spouse has a plan.

If self-employed the SEP and SIMPLE as stated above will be lower cost than solo 401(k). 2012 SEP can be done through tax filing but SIMPLE is closed for 2012. The SEP has higher limits - $51k in '13 - but limited to 25% of income; SIMPLE is flat $12k limit regardless of (but no higher than) actual income so the best choice depends on expected income.

Comment   |  Flag   |  Feb 09, 2013 from Western Springs, IL

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12 votes
Kevin J. McNab Level 19

Erik - I agree with all of the above answers. I believe the main theme in all the answers is that you have to pay yourself first. A systematic monthly contribution to any of the types of accounts listed above will accomplish this for you.

The above suggestion is something you can control. Let me throw something else out there also. In the past, 401(k) plans were mainly offered through bigger employers. Smaller employers can now offer an extremely competitive 401(k) at a low cost due to technology. You can always suggest that upper management look into offering a 401(k) as a way for employees to save money for retirement and attract and retain employees.

Comment   |  Flag   |  Feb 11, 2013 from Westminster, CO

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9 votes

Erik - All of the above answers make tremendous sense. All of it though depends on your personal situation (i.e., age, annual income, spouse income, etc.). I would recommend seeking the help of a financial advisor to get you on the right track. There is not a better decision you can make than to become knowledgeable of your retirement needs/wants and more importantly, how to get there. Good luck to you! Marcus

Comment   |  Flag   |  Feb 11, 2013 from Long Beach, CA

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6 votes
Jason Hull Level 20

Erik--Both of those are great answers. I'm going to throw a different direction at you. Have you considered looking into entrepreneurship? I'm not talking about going out and raising $50 million in venture capital for the next Facebook or Google. Instead, I'm talking about opening up a little side consulting gig or a service business or something where you get paid for a hobby that you enjoy. According to The Economist, 41% of the world's millionaires are entrepreneurs ( http://www.economist.com/node/17929057 ). It can be an extra source of income for funding your IRAs, or if it does well enough, then you can open up a SEP, a SIMPLE, or a solo 401(k), all of which add to what you can save for retirement. I founded, built, and sold a software development company on $400 of initial equity investment, so it can be done.

If you're interested in going down that route (along with fully funding your IRAs as mentioned above), I have a rule of 6 months/$1,000 for your side gig. You can read about it here: http://www.hullfinancialplanning.com/an-alternative-to-stocks-for-your-5-at-risk-capital/

Regardless of what you choose to do, make sure that you actually do it rather than talk about it. Dan has a great idea for automatically setting aside the amount each month.

Comment   |  Flag   |  Feb 09, 2013 from Fort Worth, TX

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3 votes

Erik, I don’t know how old you are, or what your earnings are. The first thing you should do is maximize an IRA or Roth IRA. The reason for that is Uncle Sam offers a tax incentive if you save for retirement, similar to the tax advantage you would get in a 401(k). Basically, in a traditional IRA, you do not pay tax on the earnings contributed to the plan now, but you pay the deferred tax at retirement when you withdraw it. On a Roth, you pay the tax now, and it grows tax-free and is withdrawn tax free at retirement.

Be forewarned; this is not a vehicle to save money to buy 22” wheels for your Camaro. It is a long term investment and amongst a myriad of rules is one for the penalty if you withdraw money before age 59 ½. Don’t put money into a retirement account unless you are earmarking it for your retirement. If life throws you a curve, you can withdraw money, but it should be a last resort. If you can maximize your IRA contribution, if you have a need for life insurance, you can invest in a cash value life insurance, but be cautious. Some market this as an alternative to a 401(k). It is not. After tax dollars are used as premium payments, similar in some ways to a Roth. Your money can grow tax–free and you can make distributions tax-free, similar to a Roth. But it is not without risk. One pitfall is if your policy ever lapses, all distributions become taxable. Another is you are paying comparatively high administrative expense and mortality expense, or the cost of the actual insurance.

You are getting a lot of opinions here. Use this knowledge to consult a local financial planner. Ask questions. Find one you feel comfortable with

Comment   |  Flag   |  Feb 25, 2013 from Delray Beach, FL

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3 votes

Erik, Good question; and whether you use a Traditional IRA, Roth IRA, or taxable account is up to you and largely a philosophical decision. A traditional IRA offers a tax-deduction right now, Roth gives no immediate deduction, however it does give you the comfort of not paying taxes on the funds in the future, a taxable account gives you flexibility to use the funds for whatever you wish without the rules (and possibly penalties) that come with investing in other retirement vehicles.

In my opinion, one of the most critical things you are lacking by not having an employer-sponsored retirement plan available to you is the automated savings component. Participants in 401(k)s are lucky enough to have a system where contributions are taken directly out of their paycheck and deposited into the plan. This takes the task away from them, and the money is gone and saved before they have a chance to spend it. Hopefully, you are a diligent saver and are disciplined enough to make regular contributions on your own, but many people are not.

For this reason I recommend that you do whatever you can to automate the contributions to whichever type of account you decide to establish. This way you don't even have to think about initiating payment yourself, it happens automatically every payday. It is almost like having your own personal “mini-401(k).” If set up properly, you will also be able to take advantage of the investment concept called “dollar-cost-averaging” whereby you are buying investments are regular intervals regardless of what the market is doing.

Whichever way you decide to go, being disciplined is key and setting up contributions to be automated is a great first step. I also encourage you to keep good records and save statements as your tax-preparer may need to reference this information.

Comment   |  Flag   |  Mar 21, 2013 from Bay City, MI

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2 votes

To plan for something as important as your retirement, you really should sit down with a salaried or fee-only professional. While there are a lot of good thoughts expressed in the other answers to your question, a forum is not really the place to design your individual retirement plan.

If you are just starting out, I would go down to a local Charles Schwab office and ask to speak with someone there. They work on salary and will take the time to help you. If you have at least $100,000 in investment assets already, you may prefer to work with an independent fee-only professional like the people on this site. Look for someone that is experienced and local to you, if possible.

Comment   |  Flag   |  Mar 22, 2013 from Charlotte, NC

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