Don’t Wait for a 401(k) to Start Saving for Retirement

Investing, IRA, Retirement Planning, Roth IRA
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Congratulations, college class of 2016: You walked across that graduation stage and into a better job outlook than members of the seven classes before yours had, according to the Economic Policy Institute. A promising 21% of you even accepted a job prior to graduation, up from just 12% last year.

But the definition of “job” has become, shall we say, malleable since the recession and the resulting “gig” economy. Even in a strong market, it’s possible the one you land will look less like a full-time role with all the benefits, bells and whistles, and more like an internship, part-time position, freelance work, or all of the above strung creatively together.

There’s no shame in that, but it could be partly why only 47% of workers ages 18 to 29 have access to an employer retirement plan like a 401(k). (That number rises, along with participation rates, to 63% in the 45-to-64 camp.)

Not to skip to the ending, but the start of your career is the best time to begin planning for the finish, also known as retirement. Most of us don’t have to work very long to know we don’t want to do it forever; even if you find you do, the universe may have alternate plans. In your 20s, it’s hard to imagine being laid up and unable to work; as you age, it becomes infinitely easier to envision.

The good news: You don’t need a 401(k) to save for retirement, and you shouldn’t let lack of access stop you.

What you do need is an IRA

An IRA is a retirement account that isn’t attached to an employer — you open an IRA on your own, typically at an online broker, and then choose your investments from a very broad pool of options.

» MORE: How to invest your IRA

In most cases, younger workers will want a Roth IRA. What’s so magical about these: You can contribute up to $5,500 per year. Once invested, that money will grow, grow, grow, and when you hit age 59½, you can start pulling it out tax-free. You’ll never pay taxes on the investment growth, as long as you follow the IRS’ rules for distributions.

The other type of IRA is called a traditional IRA, and it flips the tax treatment: Contributions are tax-deductible, but withdrawals in retirement are taxed as income.

» MORE: Roth vs. traditional IRAs

An IRA is a great supplement to your retirement plan, even if you do have a 401(k). (Here’s how to juggle both.) But if you don’t, an IRA is basically a necessity. You can open an IRA if you have taxable compensation, so if you’re an unpaid intern by day and rideshare driver by night, you’re eligible to contribute. Roth IRAs do have eligibility rules based on income, so if you earn too much — more than $132,000 per year if you’re single — the IRS takes this option off the table. In that case, go with a traditional version.


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The early years are the most valuable years

You might not feel all that valuable now, as you’re still sharpening your skills and learning the ropes of adulting. But these years are golden when it comes to your retirement, thanks to compound interest, which boils down to this: As the money you save or invest earns a return, future returns build on that bigger balance. So if your investments return, say, 4% — the equivalent of $4 on a $100 balance — the next return will be paid based on a $104 balance, which means you’re earning a little bit more each time.

That doesn’t sound like much, but when you get into larger amounts of money — as you will, eventually, if you save consistently over time — it’s huge. The table below shows how much you would have to save starting at various ages to end up with $1 million by age 65.

Starting ageMonthly savingsTotal saved Investment growthAccount value at age 65
25$377.73
$181,409.46$818,590.54$1 million
35$814.97$293,488.01$706,511.99 $1 million
45$1,913.13$459,251.24$540,748.76$1 million
55$5,767.94$692,252.48$307,747.52$1 million
* Assumes 7% average annual return

It speaks for itself: The 25-year-old — let’s pretend it’s you — contributes much less money overall, but those small contributions are boosted by over $800,000 in investment growth over 40 years. And if you invested in a Roth IRA, that investment growth is completely tax-free when you take distributions in retirement.

As for the other investors, due to that later start, they’d need to save above the $5,500 annual IRA contribution limit to reach $1 million. If they don’t have a 401(k), that would mean utilizing a taxable brokerage account.

These may also be your peak earning years

Here’s something that might surprise you: We see the biggest wealth increases in our 20s and 30s, according to recent data from the Bureau of Labor Statistics.

That doesn’t mean we earn the most during those years, but that our income jumps the most. If you can capitalize on those jumps, by increasing your savings rate with every raise, you’ll put yourself in a good position for retirement without much sweat (this is a fast track to that $1 million, NerdWallet research recently showed).

Your 20s are also a time when expenses tend to be fairly low — aside from, of course, the burden of student loans, but there are a lot of reasons why saving for retirement should come first. You may struggle a bit to prioritize competing goals — buying a home, building an emergency cushion — but a Roth IRA can actually help there, at least in a pinch: If absolutely necessary, you can pull out contributions at any time.

Once you start itching to settle down — to buy that home and perhaps start a family — you’ll no doubt be faced with a tighter budget (children, you may have heard, tend to want to eat on your dime). The best way to get to a comfortable retirement is to save as much as you can, when you can — and the time to supercharge that effort is now.

Arielle O’Shea is a staff writer at NerdWallet, a personal finance website. Email: aoshea@nerdwallet.com. Twitter: @arioshea.