Despite the variety of benefits and perks that my day job provides, they do not offer a 401(k) plan. And I'm not alone! According to the U.S. Bureau of Labor Statistics, only 49% of workers employed at companies of 99 people or less are offered any type of retirement benefits.
So, how exactly should I be saving for retirement?
I am immensely fortunate that my only debt is my mortgage (with a low 3.25% fixed interest rate) and I am comfortable with the three month emergency fund that I have built, so I've focused on maxing out my Roth IRA for the past couple of years. I plan to be in a higher tax bracket by retirement, so it makes sense for my earnings to grow tax free in the Roth IRA vs. a traditional tax-deferred IRA. Last year, the contribution limit was increased from $5,000 to $5,500 for people under 50. But saving $5,500 per year for retirement isn't nearly enough.
Late last year, I opened a taxable account with Vanguard and have started funneling additional savings there. My goal this year is to save at least $1,000 per month here. My current primary investment strategy is to “buy and hold” low cost index funds and rebalance on an annual basis, as necessary. Because this is not a tax sheltered account, I'm sticking with long term investments to avoid capital gains taxes.
Other investment ideas include real estate, 529 college savings plans, peer-to-peer lending (though not currently legal in Tennessee), or saving money in your partner's 401(k) or IRA.
Would I participate in a 401(k) if given the option?
If my employer offered a 401(k), I would absolutely take advantage of it up to the company match (free money!) A 6% match on a $50,000 salary is an extra $3,000 per year. This should be considered part of your annual compensation.
After that, I'd have to review the investment choices, expense ratios, and the overall impact on my taxes. Many companies' 401(k) plans offer funds with out of control expenses (1% or more). Despite these drawbacks, it's important to remember the main benefits of a 401(k) plan – the ability to lower your taxable income and automated savings.
Readers: what kind of retirement benefits does your company offer?