A Retirement Plan When Your Employer Doesn’t Have One

No retirement plan at work? Here are some options to set one up on your own.There are retirement investment options available for those of us who work for companies without retirement plans. Just because your employer doesn’t have a plan doesn’t mean you can’t.

The day after Mr. Stapler’s last day at his job, I realized that he was leaving an organization that matched his 3% retirement contribution, and joining a company that offered diddlysquat. In all my various budget calculations of how his new income would impact our financial picture, I completely forgot to plan for our retirement contributions. With that in mind, I set out to figure out our options for retirement planning now that he doesn’t have an employer match.

WHAT Retirement Vehicle? Evaluate Tax Advantages

The primary reason for the various retirement plans available is to provide people with tax advantages for being proactive with their retirement investments. There seem to be a gazillion options available, all with different pro’s and con’s, depending on your financial circumstances. The investment vehicle that worked for you in your 20’s may not be appropriate in your 40’s, depending on your tax rate.

For example, contributions to a Roth IRA are made with after-tax dollars and contributions to a Traditional IRA are made pre-tax. So, if you are in a low tax bracket, a Roth IRA might be better for your than a Traditional IRA. But when you’re making the big bucks and are taxed at a high rate, the Traditional IRA is a valuable tool for reducing your tax payments now and paying them when you withdraw the money from the IRA, at a lower rate because you’re retired.

If your employer doesn’t offer retirement plans or you are self-employed, you have the following tax-advantaged options:

  • Roth IRA: Contribute up to $5,500 per year with after-tax dollars.
  • Traditional IRA: Contribute up to $5,500 per year with pre-tax dollars.
  • SIMPLE IRA: Contribute up to $12,000 per year with pre-tax dollars if you’re self-employed.
  • SEP IRA: Contribute with pre-tax dollars if you’re self-employed. The maximum contribution varies.
  • Solo 401(k): Contribute with pre-tax dollars if you’re self-employed and have no full-time employees. Your spouse can also participate in your Solo 401(k). The maximum contribution varies.

I could write an entire book about exploring the right retirement option, but I won’t — because others have written better books. So, I refer you to my favorite personal finance book: The Only Investment Guide You’ll Ever Need, by Andrew Tobias.

Right now, I would like to go the easiest route, which automatically knocks out the SIMPLE IRA, SEP IRA, and Solo 401(k) options — I would need to set up new accounts for those. That leaves us with the option of contributing to our Roth IRAs or opening up Traditional IRAs. Because we expect our tax bracket to be higher during our earning years than our retirement years (especially if we’re spending just $30k per year in retirement), the Traditional IRA seems like a no-brainer. But then I consider how Roth IRAs allow us to withdraw our contributions without penalty. So, it serves as a back-up emergency fund for us; one that is invested and earning money while it waits for either an emergency or retirement. A Roth could also serve as a down payment savings fund.

In the end, Mr. Stapler and I opted for opening Traditional IRAs because of the tax advantages.

WHERE To Invest? Understand Your Investment Philosophy

Now that you’ve decided on your retirement plan vehicle, it’s time to decide where to invest. I’m a true believer in investing retirement funds for the long-haul in indexed mutual funds. You will find many people like me if you google “Bogleheads.” Named after John C. Bogle, co-founder of Vanguard and author of several books, including The Little Book of Common Sense Investing, he advocates choosing a low-cost index fund and making regular contributions to it despite market fluctuations. That’s an over-simplification, of course.

We applied Bogle’s and Tobias’ rationale and chose to invest in the Vanguard Total Stock Market Index (VTSAX). It has low costs because it indexes the U.S. Stock market, and earns a consistent 4-star rating on Morningstar. We see no reason to choose a different mutual fund at this point in our lives.

Don’t just take my word for it (and don’t take your family and friends’ advice, either). Read up on investing and research your options. Start with the Tobias and Bogle books and evaluate whether it makes sense to you. Then dig in to the different online resources available. Morningstar.com is the most respected, independent, investment research available. I’m a big fan of signing up for the free 14-day online trial for two reasons: (1) It sets a deadline for you to complete your research, and (2) it’s free. Just don’t sign up during an especially hectic time in your life. If you want to invest right now, direct your money towards the Vanguard Total Stock Market Index and switch it over to the fund of your choice after you’ve done your research. (You might find that nothing else compares, and want to keep it there — that’s fine too!)

HOW Much to Invest? Calculate How Much You’ll Need to Retire

Like the question of where to invest your money, the question of how much money do you need to retire continues to be a hot topic, given the Early Retirement advocates making a huge comeback. Although we are too far behind, and too deep into debt, to retire “early,” I support the Early Retirement principle of reducing your spending now to increase your savings. By reducing spending, you also need less money in retirement — because you’ll spend less in retirement. It’s that simple.

On the flipside, traditional “rules of thumb” abound: Save 8 times your last salary; Save 10% of your income; By 30, you should have one years’ salary in retirement funds; etc. Google “retirement calculators,” and you will find a host of options. Take those calculations with a grain of salt, however, when they’re sponsored by an investment firm — the goal of the investment firm is to get you to put the most amount of money into their investments. (I know I’m cynical)

I prefer to use a method that takes into account our current spending level — not our current income. Without debt and daycare payments, we currently live on $29,000 per year. Calculating your needs doesn’t stop at simply multiplying that amount by 40 years (we should be so lucky!). You should add in your expected healthcare costs, index the amount for inflation over 40 years, and temper it for your expected return on your investments before and during retirement. It makes me tired just thinking of all those calculations, so instead I use the FIRE Calc.

On the FIRE Calc Home Page, I entered our current portfolio’s worth ($90,000), our current spending ($30,000), the number of years we are contributing plus the number of years we will be retired (60), and clicked “submit.” Then I clicked on the “Not Retired?” tab and told the calculator that we won’t retire for 30 years, and we’ll only contribute $10,000 per month. The result?

Can I retire with a $10,000 annual contribution for 30 years and $30,000 annual spending in retirement?

$10,000 Annual Contribution for 30 Years and $30,000 Annual Spending in Retirement

WHAT does that mean? It means that, in 30 years, we will have anywhere from $500,000 to $1.8 million in our retirement portfolio. It also means that, after 60 years — 30 of them spent in retirement, spending an inflation-adjusted $30,000 per year — we will have over $1 million in our portfolio.

When you try it yourself, the Results page will explain it all in more detail. For the sake of this oversimplified post, suffice to say that FIRE Calc makes the inflation adjustments, takes into account your spending, and then shows you all the possible scenarios of what could happen to your investments over whatever number of years you ask it to calculate.

Would we be comfortable with this retirement scenario? Yup! Anything that doesn’t have us dipping below the $0 line is okay for this years’ purposes. For that matter, what would a contribution of $5,000 per year look like?

Can I retire with a $5,000 annual contribution for 30 years and $30,000 annual spending in retirement?

$5,000 Annual Contribution for 30 Years and $30,000 Annual Spending in Retirement

We wouldn’t dip below $0, but I don’t think I would be comfortable with so little in the bank 30 years after retirement. After a discussion with Mr. Stapler, we decided to contribute $7,500 — a 60% increase that is proportionate to his raise.

WHEN to Invest? Automate Contributions

Having retirement contributions on auto-pilot has been essential to us making any retirement contributions, because manually putting money into our IRAs has taken a backseat to other expenses and our debt payoff this year. Like our banking, I would prefer to just set it and forget it. We never noticed the 3% that was taken out of each paycheck, and never considered stopping those contributions in favor of other financial goals.

Not only is automating contributions easier, but it also follows the popular Dollar Cost Averaging investment model. By investing regardless of whether the market is up or down, you average out the ups and downs in order to achieve your long-term investment goals. I can’t say it isn’t tempting, however, to plunk as much as possible into the stock market while it’s down. That’s means the stock market is on sale — and you know how much I like sales! ;) But the problem with that kind of market timing is that, while you’re waiting for a sale, you could be missing out on earning money.

Here is the end result of our considerations:

  • What Retirement Vehicle: Traditional IRA
  • Where To Invest: Vanguard’s Total Stock Market Index (VTSAX).
  • How Much to Invest: $7,500 annually.
  • When to Invest: Automatically, each month.

Did I miss anything? How would you do this differently? 

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Image by artur85, via FreeDigitalPhotos.net

4 thoughts on “A Retirement Plan When Your Employer Doesn’t Have One

  1. Good food for thought, Rebecca. I hate numbers/math but this is so important and you’ve broken down the key things to think about well!

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