Best starting options to invest for retirement without a 401k

Question

I'm trying to avoid asking a duplicate question, but I feel my situation is more specific than general beginner's saving or investing. I am a university student with a part time job that does not offer 401k options. However, I would still like to start saving (and investing) for (possibly early) retirement. I am already saving 15% of my income to this end and putting it in a regular savings account. I would like to know what other places I could put this money at my age so I can earn a higher return on my investment. I am considering, for example, the following options:

• High yield savings account
• IRA
• Lower risk investing (mutual funds or something like that; I'm not an expert)

What are the advantages and disadvantages of each considering my situation? Are there any other options I should consider?

Answer 1

First, check out some of the answers on this question:

Oversimplify it for me: the correct order of investing

When you have determined that you are ready to invest for retirement, there are two things you need to consider: the investment and the account.

These are separate items. The investment is what makes your money grow. The type of account provides tax advantages (and restrictions). Generally, these can be considered separately; for the most part, you can do any type of investment in any account.

Types of accounts

Briefly, here is an overview of some of the main options:

• Standard taxable account: There are no tax breaks with this one, but no restrictions, either. If you will need the money before retirement age, or you want to invest above the limits of the tax-advantaged accounts, this is your primary option.
• 401(k): This is an employer plan, so if your employer offers it, you can use it. Generally, anything you contribute is deducted from your income taxes, and you don't pay any tax on any growth until you take the money out at retirement. Usually, this account has only limited investment options. Sometimes your employer will match some of the money you put in.
• Traditional IRA: This you manage yourself; it does not go through your employer. Anything you contribute is deducted from your income taxes, and gains are not taxed until retirement age. You can invest in almost anything inside an IRA account.
• Roth IRA: With this IRA, you don't deduct your contributions from your income taxes; you fund this with after-tax money. However, once funded, it grows completely tax free, and you don't pay any tax when you take it out at retirement age. In addition, whatever you put in, you can take out anytime if you need to.

In your situation, the Roth IRA is what I would recommend. This grows tax free, and if you need the funds for some reason, you can get out what you put in without penalty. You can invest up to $5500 in your Roth IRA each year.

In addition to the above reasons, which are true for anybody, a Roth IRA would be especially beneficial for you for three reasons:

1. Since you are only working part-time, I am assuming that your income, and therefore tax bracket, is low. Which means that it will cost you less in taxes now to put $1000 into a Roth than it would someone that is in the 25% tax bracket.
2. Because you are young, you have a long time for this money to grow before retirement. With a Roth, you pay tax now, but the investment gets to grow tax-free for many years. With a Traditional IRA, you get a tax break now, but you will eventually have to pay tax on all of the money that your investment earns between now and retirement.
3. The 401(k) option is not available to you.

For someone that is closer in age to retirement and in a higher tax bracket now, a Roth IRA is less attractive than it is for you.

Types of investments

Inside your Roth IRA, there are lots of choices. You can invest in stocks, bonds, mutual funds (which are simply collections of stocks and bonds), bank accounts, precious metals, and many other things. Discussing all of these investments in one answer is too broad, but my recommendation is this: If you are investing for retirement, you should be investing in the stock market. However, picking individual stocks is too risky; you need to be diversified in a lot of stocks. Stock mutual funds are a great way to invest in the stock market.

There are lots of different types of stock mutual funds with different strategies and expenses associated with them. Managed funds actively buy and sell different stocks inside them, but have high expenses to pay the managers. Index funds buy and hold a list of stocks, and have very low expenses. The conventional wisdom is that, in general, index funds perform better than managed funds when you take the expenses into account.

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I hope this overview and these recommendations were helpful. If you have any specific questions about any of these types of accounts or investments, feel free to ask another question.

Answer 2

There's already an excellent answer here from BenMiller, but I wanted to expand a bit on Types of Investments with some additional actionable information.

You can invest in stocks, bonds, mutual funds (which are simply collections of stocks and bonds), bank accounts, precious metals, and many other things. Discussing all of these investments in one answer is too broad, but my recommendation is this: If you are investing for retirement, you should be investing in the stock market. However, picking individual stocks is too risky; you need to be diversified in a lot of stocks. Stock mutual funds are a great way to invest in the stock market.

So how does one go about actually investing in the stock market in a diversified way? What if you also want to diversify a bit into bonds? Fortunately, in the last several years, several products have come about that do just these things, and are targeted towards newer investors. These are often labeled "robo-advisors". Most even allow you to adjust your allocation according to your risk preferences. Here's a list of the ones I know about:

• Betterment: one of the first robo-advisors and one of the most popular (managing around $1.1 billion), and, like most of the others, has a very simple interface oriented towards new investors. 0.35% - 0.15% advisory fee (depending on the amount invested).
• Wealthfront: the current leader in robo-advisors (managing around $1.7 billion). The interface is slightly more complicated than Betterment, but gives more control as I recall. The first $10,000 under management is free, with a 0.25% advisory fee for amounts over that. You can increase the amount you get managed for free by getting a referral.
• Wisebanyan: much smaller than the other players, but offers a 0.0% advisory fee. They claim to make money by selling optional paid products (not currently specified).
• Schwab Intelligent Portfolios: a relatively new entrant, with a big name behind it, also offering 0.0% advisory fees (but be careful, since they earn money off the expense ratios of some of the funds the put your money into - there is a bit of a conflict of interest there).

While these products all purport to achieve similar goals of giving you an easy way to obtain a diversified portfolio according to your risk, they differ in the buckets of stocks and funds they put your money into; the careful investor would be wise to compare which specific ETFs they use (e.g. looking at their expense ratios, capitalization, and spreads).

Answer 3

Being from the UK, I'd not heard of a Roth IRA, but it sounds very similar to our own ISA (Individual Savings Account). Having just looked it up, I couldn't believe the annual limit was so low: $5500! Still, you have to work within your jurisdiction's legal framework (or agitate for change?).

I would definitely agree with Ben Miller's answer: you need different savings buckets for the different savings objectives you'll have throughout the different periods of your life. I, for instance, am now a parent of two young children. I am fortunate to be able to provide for them on multiple levels:

1. day-to-day sustenance (food, clothing, etc.)
2. weekly pocket money
3. a medium-term cash savings a/c - generally the bulk of Christmas & birthday money they receive
4. monthly contributions to a longer-term child ISA a/c (their equivalent of your Roth IRA / college fund), and finally
5. a small monthly sum into the equivalent of your 401k

I hope that's of some help.