How to Start If You Don't Have a 401(k)
First thing, if your employer offers a 401(k) with a match, take it. Period. It’s a free lunch. This is how you start your plan.
This content is provided courtesy of USAA.
Yes, saving for retirement is daunting. But it’s way better to eat ramen in your 20s than in your 70s, right? So, first thing, if your employer offers a 401(k) with a match, take it. Period. It’s a free lunch. This is how you start your plan.
But what if your employer doesn’t offer a 401(k) or any other retirement plan? That’s no excuse. The longer you wait to start saving, the less time you get to spend with your generous pal known as compound interest. Waiting 10 years to start saving for retirement can mean having to save twice as much per month— or worse— later.
If you’re stuck with a DIY approach to retirement, don’t worry; you’re not alone. Nearly 40% of full-time adult workers have no workplace retirement plan, according to a 2010 report by the Employee Benefit Research Institute.
But even employees of Scrooge Industries have plenty of retirement saving choices, such as the variety of individual retirement accounts (IRAs). The challenge with these options is as much behavioral as financial: Unlike a 401(k), individual retirement accounts don’t offer a default investment solution, so it’s hard to know where to start.
And if retirement savings aren’t withheld from your paycheck, it’s easy to forget to save. Then one day you read a scary headline like “Most Americans will literally live on peanuts in retirement” and realize, they’re talking about me.
Below are some ways to get yourself started. Or if you want to be a bit less DIY, consider a consultation with a CERTIFIED FINANCIAL PLANNER™. Even if you’re not starting with much, they can help you figure out what type of accounts and investments are suitable for you. You can then create your own investment program to whisk money out of your paycheck and into one or more of these retirement savings tools.
You may not know what it is, but you don’t want to miss out on the tax-free withdrawals. With a Roth IRA, you pay taxes on your earnings before contributing them, and then you can withdraw them tax-free if you meet the IRS requirements. “I encourage people, if they fall within the income limits, to consider investing in a Roth IRA,” says June Walbert, a CERTIFIED FINANCIAL PLANNER™ with USAA. And if you’re just starting out, you probably make less than a six-figure salary, which is where a Roth starts turning people away.
The Roth offers flexibility because contributions (but not earnings) can be withdrawn without penalty at any time. That makes it easy to access your savings later for things such as a first home or going back to school. (But remember: Don’t treat your retirement savings like a piggy bank. You’ll need this money later.)
If you prefer a tax break now, don’t forget about the traditional IRA. You may be eligible for a tax deduction and then pay taxes when you withdraw the money in retirement. Traditional IRAs can be a good solution for families in the 25% federal tax bracket and above, says Walbert. “If you’re in those lower tax brackets, the ability to save on your taxes by reducing your taxable income is not as appealing,” she explains.
And don’t forget about nonworking spouses. “Be sure to explore a spousal IRA,” adds Walbert. “For a couple under 50, that’s a combined $10,000 they can set aside.”
Once you’ve maxed out your IRA contribution limit, you can turn to an ordinary taxable account at a brokerage or mutual fund company. “You miss out on the after-tax compounding,” says Walbert. “But the sale of investments from a brokerage account is subject to capital gains tax, which is historically less than ordinary income tax.”