When your employer offers a 401(k) account, saving for retirement becomes much easier. But what if you don't have a 401(k) account? Then you'll have to put a bit of work into setting up your retirement savings system -- but once it's in place, it'll be nearly as low-maintenance as the typical 401(k).
Step one: Set up an IRA
Without a 401(k) account, your next best option is to have an IRA. Traditional IRAs have the same kind of tax deferral benefits as 401(k)s, although claiming your tax bonus is slightly more complicated: instead of contributing money out of pre-tax dollars, as you can with a 401(k), you'll claim a deduction on your federal tax return for the money you contributed to your IRA. However, it works out to about the same thing as far as tax savings go. The vast majority of banks and brokerages now offer IRAs, so finding someone to set yours up won't be tricky. Setting up a new IRA is often as simple as going to the provider's website, filling out a few online forms, and clicking "Submit."
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Step two: Set up automatic contributions
Automatic contributions make saving a whole lot easier, and should be quite simple to set up for your new IRA. You'll need to decide how much to contribute and how often to contribute it. For many savers, small weekly contributions are easier to manage than one large monthly contribution. But whatever schedule you choose, the ultimate goal is to contribute at least 10% to 15% of your income into your IRA (you can get a more specific contribution goal by working with a retirement calculator). If 10% is more than you can afford to contribute right now, start with a smaller contribution and gradually increase it until you hit your target amount. This slow and steady approach typically makes it much easier to work a large savings goal into your monthly budget. Don't forget, though, that there's a $5,500 annual cap on IRA contributions. Be careful not to exceed that.
Step three: Pick your investments
IRAs have one big advantage over 401(k)s: you'll have a much wider range of potential investments to pick and choose. Of course, that can have its drawbacks, when you're wavering between thousands of investment options trying to decide which one is best. If you're not sure where to begin, you can't go wrong with an S&P 500 index ETF as the core of your stock investments, and an intermediate term bond index fund that buys high quality issues (meaning treasury securities) for your bond investments. You can always pick up a few individual investments later on, but having the bulk of your investments in stock and bond index funds will keep your fees low and your diversification high.
Try to allocate your money between stocks and bonds using the standard formula of 110 minus your age to determine what percentage of your money should be in stocks. In other words, if you're 35, 75% of your money should go into stock investments and the remainder into bonds. If you want to keep your investments even simpler, consider a target date fund -- your IRA provider will almost certainly offer at least one for your consideration.
Step four: Perform an annual review
At least once a year, review your account, your investments, and your contribution level to make sure they're all are where they should be. Because IRA contributions come from your bank account rather than straight from your paycheck, you'll need to manually change the contribution amount as your income rises each year to keep it at or above the recommended 10% to 15% of income. Check your account to confirm that the rules and fees haven't changed for the worse since you set it up. Finally, review your investments to make sure they're performing well. All this should take no more than 15 to 20 minutes once a year, and then you can go back to ignoring the IRA while it quietly grows and provides for your future.
