No Employer-Sponsored Retirement Plan? Here’s a DIY Version
Half of private-sector workers don’t have a workplace plan
Talk about a retirement crisis: In a country that has effectively told workers they must save for retirement — Social Security was never designed to be the sole source of retirement income — it defies logic that half of private-sector workers are left at a significant disadvantage to workers who happen to land a job with a retirement plan.
A 50-state analysis by the Georgetown University Center for Retirement Initiatives and Econsult Solutions reports that in 2020, 46% of private-sector workers didn’t have access to a workplace plan. And that’s low-balling the problem because the analysis didn’t factor in gig workers and independent contractors, who are always on their own when it comes to retirement saving.
If you don’t have a workplace plan, here’s how to create your own.
More states now offer a plan. There is no federal program that mandates that everyone must have access to a workplace retirement plan. But a handful of states have launched programs to help the uncovered. California, Colorado, Connecticut, Illinois, Maryland, New Jersey and Oregon have programs that will require all employers to automatically enroll in a state-sponsored IRA. (Seattle has a similar program.) New York is in the midst of rolling out a voluntary IRA program. Massachusetts, Vermont, Washington state and New Mexico also have state-sponsored plans that differ somewhat from automatic IRA enrollment.
These state plans are typically just a few years old, or are still in the roll-out stage. (A quick web search of your state and the term “private sector retirement plan” will get you to plenty of info.)
If you have access to an automated IRA plan offered through the state, you need to be honest with yourself. If you know you lack the motivation to open your own IRA account at a discount brokerage, or the discipline to shovel money from your checking account into your own IRA, the state-run plan is going to be a great help: It will get you past these costly behavioral issues.
That’s worth a ton. If you have it in you to run your own IRA (it’s not hard, promise) that can be the better way to go. And for any states without a plan, your own IRA is obviously the only way to go. Keep reading.
Set up your own IRA with automatic contributions. You can open an IRA account online, for free. Fidelity and Schwab do not impose an investment minimum. At Vanguard the minimum to start is $1,000 if you opt for one of its target date funds.
Betterment, a roboadvisor, also offers IRA accounts with no investment minimum, but there’s an annual fee for the service. The roboadvisor Wealthfront requires a $500 minimum investment to open an IRA account. Roboadvisors handle the investment decisions for you, based on your feedback to some investing (risk) questions you provide.
All of these options allow you to set up an automatic transfer from your checking account into your IRA account. It can be weekly, monthly or quarterly. Signing up for this free service (your bank won’t charge you either) is crucial. The secret sauce of retirement saving, whether it’s in a 401(k) or an IRA, is committing to actually save money.
You’ll need to choose between a Roth IRA or a traditional IRA. For a variety of reasons, if you qualify for the Roth, it’s a smart option to consider.
Not sure how to invest your money in the IRA? Every brokerage offers a target date fund option.
Your own IRA at a discount brokerage can be a better deal than a state-run plan because of the cost. Because the state-run plans are relatively new and have yet to amass big assets, the annual fee that participants pay typically is 0.50% or more of a participant’s account balance. With some plans, the fee is 1%. When you purchase index mutual funds or exchange-traded funds for an IRA at a discount brokerage, the annual fee charged by that fund/ETF (it’s called the annual expense ratio) can be less than 0.10%. That’s a big savings every year.
The DIY approach isn’t perfect, but it’s better than not saving for retirement.
In most workplace retirement plans, the employer chips in a matching contribution, and that helps accelerate savings.
Employer plans also offer the opportunity to save more. In your own IRA, if you work for someone else, the maximum you can save this year is $6,000 if you are younger than 50, $7,000 if you’re at least 50. In an employer sponsored 401(k) or 403(b), the 2021 annual contribution limit is $19,500 if you’re under 50, $26,500 if you’re at least 50. Self employed? With a SEP-IRA you may be able to save a lot more than the regular IRA limits.