Saving for Retirement without a 401k

So far in my life, I have had some pretty stellar jobs (one year I wrote “shark wrestler” when describing my job to the IRS on my tax forms).

Stellar jobs, yes…but so far no 401k has come my way. I am very aware that investing early will lead to much more wealth in retirement because of the miracle of compound interest. I don’t want to miss out on that extra giant pot of money, but how are you supposed to save for retirement without a job that gives you benefits?

The answer is a Roth IRA. It is named after Senator William Roth (DE), who led the fight to help create this awesome savings tool. IRA stands for Individual Retirement Account. Not so tricky!

A Roth IRA is the best choice for twentysomethings. A Roth IRA is a diversified set of investments (similar to a 401k in this way), but the biggest difference between a Roth IRA and a 401k is that a 401k is funded with pre-tax money, and then you are taxed when you take the funds out. A Roth IRA is funded with money you have already paid taxes on. You let the ca$h money sit in there for at least 5 years, and when you take the money out (as long as you are older than 59 1/2) YOU DO NOT HAVE TO PAY ANY TAXES ON IT. NONE. You don’t even have to pay taxes on the compound interest that you have earned. This is an awesome deal!

There is also something called a traditional IRA, but if you are young and expect to make a ton in compound interest (which you do)- then go for a Roth IRA. A traditional IRA is funded by money that is not taxed when you put it in, but when you take the money out you pay normal income tax.

I am a full-fledged Roth IRA fan but there are (very few) reasons why you would choose a traditional IRA instead.

  • Roth IRAs have income limits. If you make over $95k individually or $150k as a couple, you can’t get a Roth IRA. So go with traditional.
  • If you are making a lot of ca$h money now, but you expect to be in a lower income bracket when you retire, you can save on your tax bill by not paying taxes on your investment now (in the higher bracket) and paying them later (when you retire). If you are in your 20s, however, your interest should be massive and you will pay a lot of taxes on that interest (and also can you say for certain what kind of money you will be making when you retire? Please. Just go for the Roth IRA)

Are you convinced a Roth IRA is an excellent choice? Me too. Here are some things to know:

  • In 2014, you can contribute up to $5,500 to your Roth IRA each year. The more you invest at an early age, the better your compound interest will treat you!
  • If you are married, both you and your spouse can have a Roth IRA even if you only have one income (which means double the potential for investing!)
  • You can always take out the initial contribution that you had invested without penalty. This makes the Roth IRA kind of like a secret savings account for yourself- except compound interest is so good I do not recommend that you do this except in extreme emergencies (you have already tapped out all of your other savings accounts)
  • You can set up your Roth IRA to automatically reduce the risk in your portfolio as you get closer to retirement, so you don’t even have to worry about anything. I just picked that option when I opened my Roth IRA and I don’t ever have to fiddle with it (unless I want to, of course!). Extremely low maintenance.

If you want to take out more than your initial contribution (the interest that your money has earned) you will pay a 10% penalty if you are not 59 1/2 yet unless you are taking it out for any of the following reasons:

  • Educational expenses
  • Medical expenses that are over 7.5% of your adjusted gross income
  • First time homebuyers can take out up to $10,000
  • Costs of a sudden disability

So you still have access to all of this money in case of a big emergency. However, if you spend your retirement what will you do when you retire? Also, remember that each $1000 you put in today could be worth over $10k when it is time to retire. I don’t want to rob my future self of that easy money! I pretend that the money is GONE and I have promised myself that I am not touching it. It does make me feel better, though, to have a source of backup funds just in case all of my other financial strategies get tapped out.

Stay tuned for next time- we can talk about HOW you actually set one of these suckers up.


The 401k…aka FREE MONEY.

“I would never sign up for a 401k because there is no way I can run that far.”- my hilarious boyfriend

Back in the day, almost all companies provided their employees with a pension. This meant that after they retired, the retirees would get a certain percentage of their former salary (usually 50%) every year until they kicked the bucket. As you can imagine, a pension is a pretty desirable thing to have because you never have to worry about running out of money!

But then. People started living longer. Which meant that it was costing companies a lot more to provide pensions to their employees. So nowadays it is extremely hard to find a job that will give you a pension (except for military, firefighters and policemen and a few other jobs). If you have a pension coming to you, YOU ARE THE RETIREMENT WINNER. DON’T QUIT YOUR JOB.

Everyone else who gets retirement benefits from their company probably have a 401k. The name 401k comes from a tax code, which is boring and kind of confusing (my boyfriend is still lacing up his running shoes), so from now on I will be referring to a 401k as what it really is and that is FREE MONEY (well, it’s a little more complicated but there is free money involved, so let’s just call it that.)

401k FREE MONEY is meant as an alternative to pensions to help you save for retirement. They are investment plans that usually include a broad portfolio of investments including stocks, bonds and money market investments. Here are a few basic pieces of info about 401k FREE MONEY:

  • 401k are called FREE MONEY (by me) because when you invest in a 401k FREE MONEY, most companies will match your contribution up to a certain percentage of your income (usually 3%).  So, if you make $100,000 a year and you invest $3,000 per year in your 401k FREE MONEY, your company will also put $3,000 into your retirement. That means that you now have $6,000 in your retirement (but you only paid for $3,000). Your company is really paying you $103,000 per year instead of $100,000 (you just got a raise even though you can’t access it yet!) This is why it is called free money. Because it is money. That is free. You don’t have to do anything except sign up for it (which you should do IMMEDIATELY).
  • 401k FREE MONEY has an added benefit for those of us who love automation, and that is that your contribution to your 401k FREE MONEY is pre-taxed and it is automatic. You never get the money in  your bank account so you will never be tempted to spend it.
  • You can usually contribute more than your company’s match (this is recommended unless you are drowning in debt or you have super tight finances).
  • If you are paying off high interest debt (most likely credit card debt), deciding whether to contribute to a 401k FREE MONEY or to pay down your debt can be tricky. You should still be putting in enough to take full advantage of your company’s match policy (it’s like earning 100% plus some extra interest on your 401k FREE MONEY, kids! That is a much better rate than whatever your credit card is charging you). You may want to hold off on investing more than the matched amount until your debt is managed.
  • Your 401k  FREE MONEY is earning compound interest. This means that not only are you doubling your investment right away (amazing!) but also, given a little time, your doubled money will start earning interest on its interest (ooh, aaah!) See how it can add up?

Remember the example I gave about investing $1000 for 40 years at 6% interest? Here is what happens to that $1000 if the initial investment was matched by an employer:

Number of years Take your income home and keep it in your mattress Invest it at 6% on your own Invest it at 6% with your employer’s matching program













Each strategy still costs you $1000, but now you can expect to get double the returns! Lovely.

  • 401k FREE MONEY can get complicated. This is because the rules are written by lawyers who want you to be intimated by the confusing language and complicated (boring) paperwork. It is in the company’s best interest to provide you with access to  401k FREE MONEY because that is an incentive for you to come work for them…but they hope you don’t take full advantage of it because then they have to give you FREE MONEY. So the language is written by lawyers to make it confusing, but as part of having a 401k FREE MONEY plan your company will have an administrator whose job it is to help you with that language. So make friends with your administrator.
  • Because of the stupid lawyer language, there are lots of rules about when you can access your FREE MONEY (not till retirement unless you want to pay steep fees). There is also a Federal limit as to how much you can contribute each year to your 401k FREE MONEY (in 2013 it was $17,500). There are different contribution rules if you are over 50.
  • Because you put the money in without paying taxes on it, you are going to have to pay the piper eventually. This means that when you do retire, Uncle Sam will take income taxes out of your withdrawal from your 401k FREE MONEY. If you take the money out before retirement age you will pay taxes PLUS a 10% penalty. Boogers. Try to avoid that.
  • If you are looking at all the different 401k FREE MONEY plans that you can choose from, it can be overwhelming to compare risk vs payoff vs timing…they can become high maintenance! But fortunately for you, there are some easy choices including something called a target-date fund, which invests more conservatively as you get closer to retirement (your “target-date.” Get it?).
  • Don’t forget to name a beneficiary (the person who benefits in case you die early in a freak accident). Otherwise the money gets torn up into little pieces and flushed down the toilet. I’m serious. You can name me as your beneficiary, if you want.
  • Finally, if your company goes belly-up before you retire, never fear! Your 401k  FREE MONEY is safe. Just take the money and roll it over into an Individual Retirement Account (IRA) so that you don’t have to pay the 10% withdrawal fee. More on IRAs later. They are pretty awesome too.

Here is the take-away: 401ks give you FREE MONEY. No other way of saving will give you free money right off the bat. So, (if you haven’t already) take a deep breath and put on your big-kid panties to prepare yourself for dealing with some complicated rules, call your company’s 401k FREE MONEY administrator to get your 401k FREE MONEY, make the full contribution that will be matched, and get ready for retirement on your own tropical island, you savvy saver you!

Don’t have access to 401k  FREE MONEY through your job? Me neither. (One day, fingers crossed!) That means you can set up your own retirement account so that you can be just as savvy as all those lucky ducks with access to 401k FREE MONEY. I’ll tell you all about it soon.

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