401(k)’s are a pretty helpful and easy way to save for retirement. Its company sponsored which means that contributions are taken right out of your paycheck and go right into your retirement account. This makes it easy as it forces us to save that cash instead of facing the temptation to spend it first. Another good feature is the matching program that some companies offer, giving you a nice little free bump to your contributions. Although it has it’s downsides (sometimes higher fund fees and less options), I typically recommend people take advantage of their company sponsored 401(k). Unfortunately, not all of us have access to a 401(k), whether our company doesn’t offer one or if we’re self-employed. Sometimes it’s easy to forget about retirement without a 401(k) option as we’re unaware of how to save for retirement without one. In my mind, this isn’t a good reason to keep you from saving for retirement. It’s my goal in this post to explain the process and manner in which you can still save for retirement!

The WHY

Firstly, it’s important to understand the why behind the need to save for retirement on your own. Sure maybe one day (could even be one day soon) you’ll find yourself at a job that offers a 401(k) or maybe right now it’s tough to finagle the cash to save. However, there’s no time like the present, and if it’s difficult to save now, it’ll probably still be difficult to save later. Saving for retirement is a crucial task for young professionals. It’s becoming fairly evident that relying on the government (Social Security here in the US) won’t get us through our golden years and therefore should be our task and responsibility to prepare on our own. The best way to do this is not only to save, but more importantly, to invest.  Investing involves some risk, but the potential returns are much higher than just keeping your money in a bank account. Young professionals have many years ahead of them, and sure there will be some ups and downs but historically, investing has proven a great method to save for retirement. Take responsibility and pride in yourself, and start saving now. Compound interest is incredible and only gets better with time. Saving even a little for retirement now can make a HUGE difference later on in life.

The HOW

Investing for retirement is easy to do even without a 401(k), through what is called an IRA (Individual Retirement Account). An IRA is set up in a tax manner called a ROTH IRA, which involves paying taxes on contributions now, and then not paying taxes on the growth. A lot of people (including myself) like the idea of paying my tax now, and then letting my money grow and compound over the next 30-40 years…tax free! You can contribute up to $5,500 (as of this year) annually into your IRA, and can invest it in a variety of investment choices, with the most typical being stocks, bonds and index/mutual funds. An IRA can be opened and set up at a variety of locations, with the most common being an online brokerage (Fidelity, Vanguard or Scottrade), your bank or your insurance agent. For a lot of readers, I think I’d just recommend heading to your local bank to help you open one. Many banks have their own brokerages (i.e. Bank of America has Merrill Lynch) or other banks may have existing partnerships in place. The bank will be glad to help you get an IRA set up and should be able to do so free of charge. If they do try to hit you with a fee, I’d recommend looking elsewhere. You’ll fill out some forms and then it’ll be setup. You’ll be able to throughout the year put money into your account and invest it. You actually have until April of the following year to put cash in to count towards the prior year’s $5,500 max. You can set it up online to directly transfer from your bank account as well, making the process quick and painless!

The MANNER

Once you’ve got your IRA set up (congrats!), the next phase will get a little intimidating, and unfortunately turns a lot of young professionals off from investing. The overwhelming and confusing next step is actually choosing the investments itself. As mentioned earlier, you can invest in a plethora of different investment products. You could put all your money in the stock of one company, or put the money into a basket of stocks, called a mutual fund or ETF (exchange traded fund). Please don’t let this overwhelming decision stop you from moving forward with getting an RIA setup. You are always free to buy/sell/trade your IRA and so if the first batch of decisions aren’t working out, you’re perfectly able to learn from your mistakes and get into another option. What I recommend, and granted I’m not an investment professional (but most would agree), is getting your money into a stock index fund. An index fund is a single fund that owns typically 100-200 different stocks. This method is based on the old adage of not putting all your eggs in one basket. A typical index fund will have a couple of big winners, a couple losers but ideally on the whole will grow at a nice, steady pace. If you have the option (and you should), look for a Vanguard index fund, as Vanguard is known for having the lowest fees of any mutual fund/ETF. Companies that run and manage the mutual funds need to make money too and do so by charging their own fees. The way to get around these fees is to buy individual stocks but then again, typically good, professional management comes with mutual funds and so it’s worthwhile and less risky to go with index funds instead.

Hopefully that was a good overview of opening a retirement account on your own. Now you don’t have any more excuses! I apologize if this article was a little lengthy, I just get really excited talking about saving for retirement (nerd alert) and want to encourage others to save and invest on their own. I’ll do a quick summary below:

• Saving for retirement outside of a company sponsored 401(k) involves setting up an IRA (individual retirement account).
• You’ll pay tax on your contributions now and then not again for the life of the account. You can contribute up to $5,500 each year.
• It’s important to note that with an IRA, you can’t make any withdrawals until you’re 59 ½. You can do so before but you’ll pay a steep penalty. It shouldn’t be an issue, save smart and leave an emergency fund for yourself.
• You can open an IRA through an online brokerage, your local bank, or your insurance agent.
• Through your IRA, you’ll most likely invest in stocks, bonds or mutual funds/ETFs. YMF recommends investing primarily in index funds.

Saving a little now for retirement will go a long way later on, so go ahead and get started today!