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What to do if your first job out of college doesn't offer retirement benefits

A 401(k) account can be a powerful tool to save for retirement, but it's not the only one.

Sidekick | Getty Images

Graduating college is a huge accomplishment. But even after graduates have completed their studies and left campus life behind, many will prepare for their next chapter in life: entering the workforce.

There are many types of opportunities out there for recent graduates including internships, fellowships, contract roles, freelance roles and full-time or part-time employment. And while you may be earning an income from these positions, not all will provide you with company benefits like health insurance or retirement plans.

When I graduated from college a few years ago, my first position — a fellowship — didn't offer fellows retirement benefits, which is pretty standard for fellowships, internships and contract or freelance roles. Of course, at the time I thought I didn't need to think about retirement yet so it didn't bother me.

However, investing money for retirement sooner gives your money more time to grow and compound on itself, which means you'll have more funds to rely on when you stop working. And for most people, their first opportunity to save for retirement comes from their employer-sponsored 401(k) account. So it may seem hard to start investing for retirement when you don't even qualify to participate in your employer's plan.

Below, Select explains what exactly a 401(k) is and how you can use an IRA or Roth IRA to save for retirement even if your employer doesn't offer retirement plans.

What is a 401(k) and why should you care?

A 401(k) is an employer-sponsored retirement plan. Often times, employees are automatically enrolled when they begin working at a new company, but those who aren't can usually just discuss enrollment with HR.

There are two types of accounts: a traditional 401(k) and a Roth 401(k), but employers most commonly offer a traditional 401(k). With a traditional 401(k), a percentage of your pre-tax income from each paycheck is automatically contributed to your account and invested.

You can choose the percentage of your paycheck that you want to contribute, and you can usually choose the type of investments you want for your account (it's typically a selection of mutual funds, index funds or a balance between stocks and bonds).

Some employers even offer to match up to a certain percentage of your contributions. This means that they'll give you additional money for your retirement account, up to a specified point. The match terms will vary depending on your employer.

Some may match dollar-for-dollar up to a percentage of your salary; others might match a portion of every dollar, up to a certain percentage. Be sure to read the terms to understand how much you need to contribute in order to qualify for the match, otherwise you may be leaving money on the table.

One of the most powerful things about the traditional 401(k), though, is that the money grows on a tax-deferred basis until you make withdrawals in retirement. This is because you're contributing pre-tax money to the account.

So while you won't be responsible for paying taxes on your retirement account now, you will pay the tax bill on the amount you withdraw each year at age 59 1/2. The idea here is that because you won't be working in retirement, you'll be in a lower tax bracket. This helps you save on your tax bill now, so you can use more of your money on your current needs and wants.

Similar to any investment account, the most important element of a 401(k) is time. The earlier you start investing in a retirement account, the more time your money has to grow. Adults who start saving for retirement in their 40's have to contribute more each month compared to adults who start saving for retirement in their 20's. And when some of life's other big expenses come around, like buying a house or paying for your kid's college, it can be difficult to hit the level of saving you need in order to have a sufficiently funded retirement account.

Plus, most people severely underestimate how much money they'll need to retire comfortably. While the amount needed will depend on how much you plan to spend each year in retirement, Merill Edge crunched some numbers and found that you'll need $1.5 million if you want to live off of $61,350 per year in retirement. One million dollars can allow you to withdraw $40,900 per year, and just $300,000 means you'll only have $12,270 per year between the ages of 65 and 91.

An analysis by Fidelity also mapped out how much money you should have saved at each age in order to retire. By age 30, for example, you should have the equivalent of your annual salary saved — so let's say you earn $55,000 per year; you should have $55,000 saved by the time you turn 30. Then by age 40, your savings should be triple your annual income; so on a $55,000 salary, you would want to have $165,000.

Bottom line, the sooner you start saving for retirement, the more money you'll be able to live off of by age 65. But if you hold a non-staff position at your company, chances are you don't qualify to start saving under a company's 401(k) plan. And depending on how long the position lasts, it can be a while before you're able to take advantage of those retirement benefits. Fortunately, your employer's 401(k) isn't the only option out there.

What is a Roth IRA?

IRA stands for (individual retirement account). Unlike the 401(k), you don't need to work at a company in order to open up an IRA. There are also two types of accounts: a traditional IRA and a Roth IRA.

The traditional IRA is similar to a 401(k) in that you make pre-tax contributions into the account. However, with a Roth IRA, you make post-tax contributions to invest and because of this, you won't pay taxes on your withdrawals in retirement. This means your money grows completely tax-free (but keep in mind that early withdrawals before age 59 1/2 may be taxed and charged a penalty).

There are Roth IRA contribution limits you should be aware of. If you are under age 59 and earn less than $139,000, you can contribute up to $6,000 per year.

How do you open a Roth IRA account?

To open a Roth IRA, you just need to be 18 or older and have earned income each year you make a contribution. For example, if you're still in college and have a paid internship for the summer, you can contribute. Because of this, the account can help you get ahead on your retirement savings even if you don't qualify for your employer's 401(k) plan.

When creating a Roth IRA account, you'll need a few pieces of information, like your date of birth, social security number and your bank information for transferring funds.

There are lots of institutions that offer accounts, but Fidelity offers an option for a Roth IRA that just takes a few minutes to sign up for. They even have resources that can help you figure out which types of investments you'd like to pick for your account (you can pick from mutual funds, ETFs, index funds, stocks, bonds, annuities and CDs).

Fidelity Investments

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    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum to open a Fidelity Go® account, but minimum $10 balance according to the investment strategy chosen

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But if you want a more hands-off approach when it comes to investing your Roth IRA money, Wealthfront offers a robo-advisor to help you automate your investing. Your money can be invested among a mix of stocks, bonds, ETFs and alternative asset classes like real estate, natural resources and dividend stocks. Wealthfront's robo-advisor will automatically rebalance your portfolio based on your risk tolerance. Just keep in mind that you'll need a $500 minimum deposit ready when you sign up.


  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. $500 minimum deposit for investment accounts

  • Fees

    Fees may vary depending on the investment vehicle selected. Zero account, transfer, trading or commission fees (fund ratios may apply). Wealthfront annual management advisory fee is 0.25% of your account balance

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    Stocks, bonds, ETFs and cash. Additional asset classes to your portfolio include real estate, natural resources and dividend stocks

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Terms apply.

Once you open up your Roth IRA, all you have to do is consistently make additional contributions and watch your retirement fund grow over time. Remember, you'll be contributing after-tax income so creating a budget of all your expenses can help you figure out how much you can comfortably afford to contribute to your Roth IRA each month (here's how to create a budget in five simple steps). Even putting away just $50 per month can get you further along than contributing nothing at all.

Bottom line

Saving for retirement is a very important part of your future financial health. Contributing money to a 401(k)— an employer-sponsored account — can help ensure that you have money to live off of during retirement.

But if your new internship or freelance role doesn't offer you 401(k) benefits, you can still get ahead of retirement contributions by opening a Roth IRA. Plus, its tax-free advantages mean you can make withdrawals in retirement without paying a dime toward a tax bill.

As with any financial decision, you should analyze your situation to make sure it's the best next step for you. Creating a budget can help you figure out how much you can comfortably afford to save each month for retirement.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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