No Retirement Plan, No Excuse

“I don’t have a retirement plan through work” is not an excuse for failing to save for retirement. Tax advantaged individual retirement accounts have been available for over 40 years, and they aren’t difficult to set up. Yet the vast majority of people who don’t have a work place retirement plan, primarily those working for small businesses, just don’t save for their future.

Small businesses are at a disadvantage when providing for their employees. The costs and administration of typical employer sponsored benefits, such as health insurance and retirement plans, are often too much for small business owners to handle. As a result only 35 percent of employers with less than 50 employees offer health insurance, and only 14 percent of businesses with less than 100 employees offer a retirement plan.

People without health insurance through work can get private insurance through their state or the federal health insurance exchange, thanks to the Affordable Care Act. In fact they are required to if they have no other access to health insurance, such as through their spouse’s or parents’ insurance plan. But there is no similar centralized source or requirement for workers without a retirement plan. The Employee Benefits Resource Institute (EBRI) Retirement Confidence Survey found that having a retirement plan is closely linked to the amount of money individuals have saved for retirement. More than two thirds of workers with no retirement plan have saved less than $1,000 toward retirement. Less than one in ten of those who have a retirement plan have saved so little.

In order to address the needs of those without access to a savings plan through work, 24 states are seriously considering establishing a state sponsored retirement plan, and another four are actively working to make retirement plans more accessible to small businesses. In January of 2014, President Obama introduced MyRAs, which are individual retirement accounts administered and guaranteed by the federal government. In all cases the aim is to facilitate automatic savings for workers through payroll deductions while eliminating the administrative burden of retirement plans for small companies.

While it is clear that making retirement plan accounts more accessible through work encourages saving, these state programs will simply create additional unnecessary responsibilities for already strapped governments. It has been possible and, for most, equally advantageous to save for retirement through individual retirement accounts since 1974, when the Employee Retirement Income and Security Act created them. Many people (even those who work for small businesses) can have their contributions automatically deposited to their IRA accounts through direct deposit made available through their company’s payroll provider. On the chance that direct deposit isn’t available, most banks are capable of making automatic monthly transfers to accounts such as IRAs. However, the EBRI data clearly indicates that people don’t set up their own accounts.

Why is that? It may be a combination of not understanding the options available and the additional effort required to set up an account. Many people do not know how or where to open an IRA, nor do they understand the advantages and differences between the types of accounts available. Furthermore, if they were to establish an account, the question of how to invest the money is an additional hurdle. Few people learn anything about these topics in school. Only 17 states require high school students to receive any education in personal finance, and only five states require a standalone course in the subject. Wouldn’t it be a better use of government resources to provide an education in this very fundamental skill than to recreate something that already exists?

If you work for a business that does not offer a retirement plan, you can create your own. You can open an IRA at just about any bank, brokerage firm or mutual fund company. For most people a Roth IRA will be most advantageous. While you cannot deduct your contributions from your taxable income, as you can with a traditional IRA, when you do withdraw your money in retirement your withdrawals are completely tax free. You can also, if absolutely necessary, withdraw your contributions (but not your investment earnings) before the allowed withdrawal age of 59 1/2 with no taxes or penalty. With a traditional IRA, you can deduct your contribution, but your withdrawals are taxable after age 59 1/2. There is a penalty for any early withdrawals. The Roth IRA is subject to income limits, but they are fairly high. You can contribute $5,500 to either type of account over the course of the year.

Since your IRA is a retirement account, I recommend that you choose a target date retirement fund for your investment. Target date retirement funds are fully diversified mutual funds invested in a manner that is appropriate for the time you have remaining until retirement. The funds come in a series with the individual funds designated by the year of assumed retirement. If you plan to retire in twenty years, for example, you would select the 2035 target retirement fund from your favorite fund company. This is the only investment you will need until you get closer to retirement and begin planning your withdrawal strategy. For more information on target retirement funds, check out my previous post.

It is unfortunate that so many businesses don’t offer a retirement plan. However if you work for one of them, you can still provide for your own financial security. Go on-line to one of the discount brokerage firms or mutual fund companies and open an account today. Make it easy on yourself by establishing an automatic deposit. When it comes to saving for retirement, don’t make excuses.

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2 thoughts on “No Retirement Plan, No Excuse

  1. Julie,

    Thank you for another well-written and researched article. As you have written, traditional 401(k) and IRA contributions are tax-deductible for both Federal and state tax returns. Unfortunately, those tax benefits are less beneficial for those in a low tax bracket. There is, however, a benefit in the Federal tax code for married couples with adjusted gross annual income below $61,000 and for single individuals with incomes below $30,500. The benefit is call the “Credit for Qualified Retirement Savings Contributions.” It is what is called a “non-refundable credit” which means that it can only be used to offset a tax liability (before any withholding or other tax payments). There are several other qualifications and limitations and the credit is phased out as income approaches the limits mentioned above, but this is a credit against the taxpayer’s tax liability which is much more valuable than a tax deduction. It is certainly worth taking advantage of if the taxpayer qualifies and should be an encouragement to save more for retirement.

    Liked by 1 person

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