My Company Doesn’t Offer a Retirement Savings Plan

I work at a job that I really really like. One of the few downsides is that there is no such thing as a 401(k) and I know there won’t ever be one. So as a 30-year-old, I have a Roth IRA set up for retirement. And all the articles say “Contribute to your 401(k)!” but what if that is not an option? Should I have a traditional IRA as well? Should I invest in a jar to stuff my money into? — K.K.

Clearly, you are in saving mode, contributing the annual maximum of $5,000 to your Roth IRA account, and I bet that if your company did offer a 401(k) plan, you’d invest enough to get a company match (if your company offered a match), and maybe even more than that.

Okay, so your company doesn’t have a 401(k) plan. That’s fine. Having money you want to save, but not knowing where to save it is a good problem to have. You really like your job, and that’s a really great thing. You can make up for the downside of not having a company retirement plan by saving on your own, and you’ve already taken that initiative by opening a Roth IRA. Unfortunately, the $5,000 maximum contribution limit for those under 50 years old is the same for both Roth and traditional IRAs, which means you can contribute to both a Roth and traditional IRA, but that sum can’t equal more than $5,000.

Since you’re focused on saving, I take it you also have a healthy emergency fund? Money to get you by in case you ever lost the job you really, really like? If you are throwing the maximum amount of money at your Roth every year, and then socking a bunch of money into a high-yield savings account, you’re in a good place. Roth projections from Bankrate show that you’re on your way to becoming a millionaire by the time you turn 65.

If you’re still looking for a place to invest your money, there are always taxable investment accounts—investment accounts that aren’t tax sheltered like a 401(k) plan—meaning you’ll pay taxes on money that these accounts earn during tax time. One easy way to get started with investing in a taxable investment account is checking out a site like Betterment, which simplifies the process for you, so you’re deciding how much money you want to invest in stocks and treasury bonds, and not which specific stocks or index funds to put your money into. I’ve spoken with the team at Betterment before, but don’t have a lot of experience with it, so I can’t personally make a recommendation, but other people have had positive experiences with it. Reuter’s Felix Salmon has more on it here.

But K.K., even if you decide to just stick with the Roth and a good ‘ol fashioned savings account, I think you’re doing just fine.

 

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Photo: Richard Cocks

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13 Comments / Post A Comment

la_di_da (#1,425)

Mike, I never want to call into question your usually awesome advice, but…a million dollars is not necessarily enough to retire comfortably these days, especially given increased lifespan after retirement. That being said, I’ve no idea how to fix that. I would talk to an investment banker at someplace like Charles Schwab or Morgan Stanley to figure out how much you’ll really want at retirement and find a plan to get there. Roth IRA plus an investment nest egg, in addition, of course, to your emergency fund.

Sheesh, I’m coming to the realization that I will NEVER relax about money, there will always be one more backup plan I’ll be determined to have… You might be totally right, he’s doing just fine.

Mike Dang (#2)

@la_di_da Yes, I do think you should consider what kind of lifestyle you want to live when you retire. My folks will not have a million dollars when they retire in a few years, but that does not mean they will not be comfortable. They live very simply, so their monthly expenses are relatively low. We should also take into account Social Security benefits (but whether or not that system will be around in the next few decades is an entirely different beast to consider).

Iglooramous (#1,397)

@Mike Dang According to Planet Money reports, the average SS benefit is $13,000 annually.

la_di_da (#1,425)

@Mike Dang You’re right, I wasn’t taking into account social security (fingers crossed it still exists!). And hopefully some kind of healthcare system. It depends on what you’re going for, of course. I’ve just seen older relatives live till 95 and run out of money at like 90 because they weren’t planning on their livers holding out that long (and trust me, it was the liver that was going to go first).

sony_b (#225)

I’d recommend a CD ladder – if you’ve got money that you would be putting in a 401k buying long term CDs to get higher interest rates may be better than savings, and you can still get it out if you need access sooner.

Iglooramous (#1,397)

When it comes to retirement planning, I like to start at the end. At what age do you want to be able to retire? And how much money do you want to have annually post retirement?

Then it’s all time value of money calculations.

But, here is the thing. An IRA (or a 401k for that matter) is merely an investment vehicle. The returns you get from it depend on how and in what you invest. While you’re guaranteed (for now)to not pay taxes on your IRA principal or earnings when you withdraw, you aren’t guaranteed earnings. In fact, if you’re like me, and you sock away your IRA maximum in a very safe CD, you’re probably losing money. The rate of inflation is greater than the interest rate your principal is earning.

That’s why it is important to not only crunch the numbers to figure out how much to save for retirement, but to adopt the onus to figure out how to invest your savings to meet your retirement goals.

ElBlynx (#499)

Hahaha high yield savings account hahaha. CD rates are at best 2% and inflation is currently at 1.4%. Unless there is some secret high interest vehicles (greater than 3%), I would say that this phrase should be retired with other quaint expressions like Pension and Career employees. Making $14/year in interest is certainly better than nothing, but it isn’t going to make a noticeable difference in my finances.

My goal is to transfer all my investments into one place by the end of the year (tiny IRA, tiny Roth IRA, and some inherited stock), so please keep up this conservation so it will motivate me to figure it out.

@ElBlynx I’ve been wondering about this! In a fit of planning I looked up “high yield” savings accounts the other day and was confounded to learn that the best I could do was earn one dollar for every hundred. Um.

readyornot (#816)

@ElBlynx Yes, please keep up this conversation to motivate us to figure it out. In fact, wasn’t there supposed to be a savings goal version of the “let’s all throw money at our problems” group activity? Then we can talk about what we’re doing.

And hey, you guys! Banks can’t offer higher interest rates on savings until they can charge higher interest rates on loans, and that won’t make sense until the Fed ups the discount rate. BUTBUTBUT! It’s low right now in order to stimulate economic activity. There’s another way you can do that other than the Fed’s monetary policy, and it’s fiscal policy. But then we have to have a Congress willing to vote for stimulus packages and other bills to help out (tax cuts for the rich do not jumpstart the economy, empirics say). So – go vote for someone who will do that!

Jon Stein (#2,062)

Jon Stein here, CEO and founder of Betterment. I hear these requests all the time. I agree there should be a way to invest for the future – a tool that helps you figure out your number, invests it for you, automates the process to avoid irrational decisions, and allows you to manage all of your investments in one place. We’re doing much of this at Betterment, and hope to do it all one day!

I agree with the majority of these comments. A savings account is suitable for an emergency account, but it’s not sufficient for the purpose of saving for retirement. This is where investing comes in – not risky stock picking or active management, but a low risk, diversified portfolio that helps you reach your goals. It’s true we are living in rare times, but investing in the stock market is still the best way to grow your savings – especially for the long term.

never (#2,071)

Savings accounts are scams! The bank is paying you what, a cent for every dollar each year, for YOU letting THEM lend out YOUR money to make a much larger return for themselves. If you need to keep stuff extremely liquid because an emergency is on the horizon, then sure, throw a bit into one — but to keep cash there for years is self-sabotage, in my opinion.

Say you’re extremely cautious — what about savings bonds? Even with flat interest rates, I-bonds are tied to inflation and EE bonds are guaranteed to at least double in value, so bonds have at least a (roughly) 4% interest rate — not great, but way better than the <1% you get from a savings account. You can buy max $10K of each type of bond per year (I think) but if you’re throwing something insane like 25K per year into super (too) safe “retirement” accounts, you need to put some money in stocks ASAP anyway. At age 30, shouldn’t 70% of your savings be in stocks,? Just invest in unhealthy things that people need, like liquor, and you’ll survive the bumps!

Also, maybe this is off the wall, but if there’s a way to start some kind of side business, you can use your status as owner of that business to open a 401(k), and put all your earnings from the business into it. You can even have the business match you at up to $2 for every $1 you put in — I think the max that you and the business can put into that account is $39K/yr and/or you can only directly contribute up to the amount of your earned income from the business.

Also, if nothing works out in terms of the usual retirement savings vehicles, you can always buy an annuity when the time comes — if you’ve found a way to invest your money well enough that you can afford one. Annuities are super expensive, but if you start investing now with the aim to buy one in 35 years, you’ll probably be able to make it, and then you’ll have income for life.

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