There are many "plans" available to individuals, regardless of where they work, as retirement investment vehicles. For those employed in the private sector, the public sector, or even self employed individuals, there are plans that are available to you that you should become familiar with and then decide whether or not you are going to participate.
But, let's say that your company or employer does not offer a retirement plan where you can contribute money for your retirement. Well, there are options for you, as well.
If you fall into that group that has no workplace sponsored retirement plan, then you have a number of plan available to you, through brokerage houses like Fidelity, Vanguard, or Schwab, for example.
You can open a Traditional IRA or you could open a Roth IRA. The nice thing about the Roth IRA is that the money you contribute has already been taxed, so if you follow some simple rules that apply to the Roth, you can end up owning a retirement plan that will be completely tax free to you, if and when you begin to take withdrawals.
What You Should Know:
When I worked for Coca-Cola (KO) we had a 401-k Plan available to us. We could purchase shares of Coca-Cola stock or we could select from a menu of mutual funds, including index funds.
One of the things that I liked about the 401-k Plan at Coca-Cola was that the contributions that I made were "before taxes" were withheld from my paycheck. That meant that for every dollar I saved, I was getting a tax break with a deduction for investing in the plan.
The other things that I liked about the plan was that it was automatic. Every paycheck, money would automatically go into the plan and I didn't have to do a single thing, other than go on about my business.
Another benefit to the plan was that Coca-Cola matched my contributions at the rate of .50 on a dollar, up to 6% of my salary. That benefit is priceless.
I started off contributing 3% of my salary to the plan. When I realized how little that affected my take home pay, I increased the contribution to 6% of my salary and seeing the relatively minor impact on my take home pay, increased it to 10% and left it at that rate for the next 19 years.
When I left Coca-Cola, I decided to roll the 401-k into a Traditional IRA at Schwab. That gave me complete control over the money in the plan and eliminated any tax consequences with the transfer from the 401-k to the IRA.
My new employer offered a 401-k Plan and I opted into that plan and this time, I raised my contribution to 15% of my salary. For the remainder of my working life, I contributed 15% of my salary and didn't look back.
What I Know:
The 401-k Plans that I participated in, at each subsequent employer were rolled into the Schwab IRA whenever I changed jobs. The advantage of having the money in the IRA was that all along, I could purchase whatever I wanted to. I could buy individual stocks, mutual funds, index funds, ETF's etc. with no limits.
In 2005, I decided that rather than invest additional money into the IRA, I'd employ the Roth IRA as my primary retirement vehicle. Every year, I funded the maximum contribution limit to the Roth, for both myself and my wife. Stocks that I purchased in the IRA were the same stocks that I purchased in the Roth.
Over time, the nest egg that we accumulated was a significant one and while we have not been withdrawing money from the IRA (RMD's begin next year for me) or the Roth IRA, we use a taxable brokerage account to supplement my retirement income.
So, What Is The Point Here?
There are a couple of points to be made here.
First, you have to get started with a retirement investment plan, whether it's with your job or it's outside of your job.
Second, you need to consider saving at least 10% of your salary and investing that in your retirement plan. Why 10%? Glad you asked, he said rhetorically.
I am a Christian. In my Christian walk, tithing money to the church is part and parcel of our lifestyle. The "tithe" is 10%. You may not follow that practice and that's fine and dandy with me. But, I tithe because I discovered early late in life that it's hard to outgive God. I don't have a prosperity gospel here, but instead view it this way. If I can't trust God with my financial needs, then who can I trust?
I don't claim that there is any correlation between giving and receiving. I'm not here to receive. I am here to use my financial blessings to help others. After all, I am not going to take one dime of my money with me, when I die. Not a cent. So, on a much smaller scale than say a philanthropist like Bill Gates, I do my part, because it brings me a certain amount of joy.
Third, don't get all hung up in your investment "style." Keep things simple at first. Invest in index funds until you feel more comfortable with purchasing individual stocks.
Sometimes, you need to crawl before you try to walk. As a newer investor, there is a learning process, like anything else. What's your hurry? Set it and forget it, invest regularly and consistently, and let time become an ally.
Fourth, the stock market will go up and it will go down. Don't sweat it. I can remember my boss at work being all pushed out of shape because he had "lost" 15% of his portfolio value back in 2008. I told him to not sweat it and just keep investing in the plan. A couple of years later, he's telling me that he has X amount of dollars in his account and he is really surprised and really happy.
When you invest regularly, you tend to "average in" to a position. When the market is up you are buying less shares of your index, for example. When the market is down, you are buying more shares of your index. The average is your cost basis.
Fifth, never leave your 401-k Plan with your employer, when you leave the company, for whatever reason. Roll the account into a self-directed IRA at a brokerage house. It you are lucky enough to have a Roth 401-k, then you can roll the account into a Roth IRA with all the benefits and perks of the Roth vehicle.
Sixth, no matter how old you are, if you are working, participate in your retirement plan. Don't stop investing because you turned 55 or 60, especially if you are going to continue to work and not retire.
Hell, even if you retire, there is no reason to not be putting money to work in your IRA or Roth.
My wife still works. She is 14 years younger than me. We file our taxes jointly. I don't have any earned income, but she does. That's income from her job. Because she has income from her job, we are able to continue funding our Roth IRA's and we do.
We fund them to the maximum contribution limits allowed us. Which is currently $6500 a year, each. Why? Well, when one of us passes away, the surviving spouse can roll the deceased spouse's Roth into their own. The money in that account continues to work, continues to be tax free if it is withdrawn, and does not face any RMD's until the Roth's are passed to the kids.
Seventh, money that isn't working for you isn't working for you. If you are not saving your salary and spending the money, then you are not preparing for the future when you can't work anymore or you don't want to work anymore.
Buying depreciating assets is a losers game. When I bought my boat, I understood that concept and bought mine used. I saved more than 60% over buying the same boat new. Ok, I made some improvements to the boat, but it's a center console boat that is designed to be a saltwater fishing boat, first and a pull the kids on water skis boat, second. It's amazing what a bit of fiberglass polish and some elbow grease can do for a 10 year old boat.
If you are investing 10% of your income, then that 10% is working for you. If you tithe 10% then you have 80% left over. If you don't tithe, you have 90% left over.
Learn to live with that. It's not all that hard.
Regardless of where you are in life, never stop putting money to work in the stock market or other investments.
Take advantage of employer sponsored retirement plans, fully. If they offer any matching funds, then contribute enough to maximize their matching funds to you.
Get started today. Not next week or next month. If you are worried about it, then contribute 3% of your salary and see how that affects your lifestyle. Adjust accordingly and take a few minutes to run your tax situation to see what each dollar saved is actually costing you.
You might be surprised at what a deal this really is.