Money for life without a 401(k)

NEW YORK (Money) -- Question: I'm in my early 30s and have yet to save for retirement. Unfortunately, my job doesn't provide a pension or a 401(k), so I need to rely on myself to save money. Can you give me some advice on how I can get started? - Annette, Ewing, New Jersey

Answer: Sure, glad to help. But before I tell you what you ought to do, let me first say that there's no need to panic just because you're starting from scratch in your early 30s. Yes, the earlier you start saving for retirement, the better. But you've still got a good 30 years or more to build a retirement nest egg. That's plenty of time, although you're going to have to put a little more into your savings effort than people who are getting help from their employer.

So how do you jump start your retirement-savings effort without a workplace plan? Well, the first thing you want to do is fund any tax-advantaged savings plans you can.

At the very least you probably should be able to do either a traditional deductible IRA or a Roth IRA. Assuming you qualify - which you can check by perusing IRS Publication 590: Individual Retirement Arrangements or going to this calculator - you can contribute up to $4,000 this year and $5,000 in 2008 (people 50 and older can throw in an additional thousand bucks).

With a deductible IRA, you get a tax deduction for the amount you contribute. So if you're in the 25 percent tax bracket and you sock away $4,000, you get a deduction worth $1,000.

With a Roth IRA, by contrast, you don't get an upfront deduction, but withdrawals can be tax-free, assuming you meet the requirements. Generally, the traditional IRA is better if you think you'll fall into a lower tax bracket in retirement than you're in now, while a Roth is superior if you think you'll be in the same or higher tax bracket.

Of course, trying to predict your future tax rate is kind of like predicting what political party will hold the White House 30 years from now. If you don't have strong feelings either way about this, I'd probably go with the Roth for two reasons. First, it effectively allows you to shelter more money from taxes. (For why that's the case, click here.)

Second, as you age, chances are you'll at some point work for a company that offers a 401(k), which means you'll likely have ample opportunity to accumulate savings that will be taxed at withdrawal. So having the Roth now increases the chance that you'll be able to diversify your tax exposure in retirement. Whichever you choose, contribute the max, if you can.

If you have self-employment income, there are other retirement savings plans you can also take advantage of, such as a SEP or solo 401(k). So if you have such income from freelance or consulting work - or you can create some - you can add to your nest egg by contributing to plans designed for small businesses and the self-employed. For more on how these plans work and how much you can contribute, click here.

Don't be shy about saving for retirement outside tax-advantaged plans too. Remember: People who participate in 401(k)s typically get matching contributions from their employer. The most prevalent arrangement is a match of 50 cents for each dollar the worker contributes of the first 6 percent of salary.

Since you're not getting a company match, you need to compensate by trying to save all you can in regular old taxable accounts as well. You won't get a tax break in a taxable account in the same sense you do with a 401(k) or IRA.

But you can still save in a tax-smart way by investing in index funds and tax-managed funds, both of which tend to keep taxable distributions down. This effectively boosts your after-tax return and the value of your nest egg. You can find out more about these options by clicking here.

Of course, disciplined saving can be tough when money isn't automatically going into your retirement account before you can get your hands on it, as is the case with a 401(k).

So I recommend you try to duplicate the convenience of 401(k) payroll deductions by setting up an automatic investing plan. Virtually all mutual fund companies offer you the option of having a pre-set sum - usually $50 or more - automatically deposited from your checking account into your mutual fund.

The beauty of this approach is that once you set it up, it all operates behind the scenes, eliminating the chance that you'll "forget" to save one month (or two or three). I highly recommend you apply this approach both to any IRA or other retirement savings account you open.

I signed up for such an arrangement a little over 10 years ago, and I can tell you that it's nothing short of amazing how within a few years even relatively small contributions turn into "real" money (not to mention money that, to my mind at least, is all the sweeter since I know I'd probably have just spent it on meaningless little things if it had been sitting in my checking account).

One final thing you can do to improve your retirement prospects is to keep an eye out for a job that offers comparable or better pay and benefits plus a 401(k) or pension (or both for that matter). If you can land such a gig and keep up as much as possible the saving program I've recommended above, you will really be on the express route to a secure retirement.