Retirement Savings, Part Three: Alternatives to Employer Plans

In the final installment of my three-part series on retirement planning, I look at what to do if you are unemployed, self-employed, or otherwise unable to access a 401(k) or similar employer-offered retirement plan. (If you have an employer plan and are wondering how best to manage it, see part one. If you lost your job and are wondering what to do with your employer plan, see part two).

Here's advice from the experts on how to establish and maximize your personal retirement fund. Much of it is similar to the advice provided in part 1, which makes sense since in both cases the goal is the same -- to secure your financial future.

1. Start Saving as Soon as Possible: "Retirement in your early 20s can seem a long way off," admits Joseph Montanaro, a certified financial planner at USAA. "But that's the biggest advantage you have -- it is a long way off, meaning you have time on your side. If can think about it now, and leverage your time, that's a real advantage."

2. Consider When it Makes the Most Sense to Pay Taxes: In the same way that the 401(k) is the most common employer-offered retirement plan, the IRA is the most common individual retirement plan. And in the same way that there are two types of 401(k) plans, there are two types of IRAs; the deferred, where you pay the taxes at some later date, once you take the money out of the account, and the Roth, in which you pay the taxes today, before depositing the money into the account.

"The best practice is to save in a Roth when you're young and your income is low, and switch to deferred savings when you're older and your income is higher," explains David Wray, president of the nonprofit group Profit-Sharing/401(k) Council of America. When you're earning less money, you'll be in a lower tax bracket. As you progress and begin earning more, you'll eventually jump up into a higher bracket. Since you'll have to pay taxes on the money eventually, better to pay them now, while your rate is lower. Wray suggests switching from the Roth to deferred once you begin earning $40,000 a year, which is roughly the point at which your tax rate at the time of retirement will likely be less than your tax rate while working.

3. Know Your Options: Though an IRA is the most common non-employer retirement plan, it is by no means the only one. For example, small business owners and self-employed workers can establish a Simplified Employee Pension Plan. Self-employed workers whose business includes only themselves and their spouse are also eligible for a Solo 401(k), though "these are really limited in terms of availability," says Christopher Hickey, a financial adviser at Merrill Lynch (BAC). "Typically where we see those are with consultants. It's available in a Roth version."

4. Make Saving for Retirement a Habit: Like any other savings account, there are two components to managing your retirement funds. First, you have to commit to consistently saving the money. If you're able to set up a routine transfer from your checking account to your IRA, you don't have to remember to move the money yourself so you're that much more likely to stick with it.

5. Don't Be Afraid to Ask for Help: A key component to successfully managing your retirement account is to be thoughtful in how you invest. "If you're going to do a good job of investing [retirement funds], you have to have the time, the discipline and the knowledge to understand your investment choices and how you should allocate your funds between those choices," explains Catherine Golladay, vice president of 401(k) education and advice at Charles Schwab(SCHW). "And that's hard to do -- to have all three of those components."

If you can afford a financial adviser -- or have a friend or family member you trust to assist you -- consider getting help determining your investments. Alternatively, Golladay says you can consider a " target-date fund," a type of mutual fund that mixes stocks and bonds, and routinely resets its risk profile, depending on when you want to retire. "As you get closer to retirement, the fund moves on a glide path from a more aggressive portfolio -- more stocks -- to more conservative -- more bonds and cash .... So a target date [fund] is a good starting place" when more personalized advice is unavailable.

6. Don't Use Your Retirement Account as an Emergency Fund:

"Far too often, I see people tapping into their retirement fund when an emergency comes up," says Golladay. "It's very, very important that people resist the urge to tap into that money to use it as a short term fix." Otherwise, you won't have money available for retirement. It's that simple.

Golladay recommends that people create a separate, emergency fund to avoid the temptation to drain their retirement account. She also suggests that it be "liquid," meaning that if you invest your emergency fund money, put it in something that is easy to convert into cash, like a mutual fund. It can even be as simple as a savings account.

Wray echoes the need for an emergency fund. "You need two pools of savings -- one for the short term, that's the emergency fund, and another for the long-term, that's the retirement account. ... In the short term, certainly people should try to have at least three months' worth of income saved for emergencies." Some financial planners suggest squirreling away six months' income, if you're able.

7. You Can Double Down: If your situation changes and you find yourself eligible for an employer-offered retirement plan, you can -- and should -- enroll, even if you have your own individual plan as well. "You can have both an IRA and a 401(k)," explains Montanaro. "In a lot of cases, we really encourage folks to have that. ...You get your pretax plan through work to reduce your income taxes today, and then combine that with the benefits of a tax-free investment vehicle like the Roth IRA so can get tax-free funds later."

8. Identify Your Long-Term Goal: According to Wray, the amount of annual income you want to plan to live off of in retirement -- called the "replacement ratio" -- is 80%. In other words, if you are earning $50,000 at the time of retirement, you want to plan to retire on $40,000 a year in order to maintain your current standard of living. Roughly 50% of that $40,000 will be provided by Social Security, but you're on the hook for the rest. "So if you get $20,000 from Social Security and $20,000 from your own plan, you're in good shape. Usually, for most people, when you stop working, certain expenses fall away, so you can live on a little less."

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Loren Berlin is a columnist at DailyFinance.com. She can be reached at loren.berlin@teamaol.com. You can follow her on Twitter @LorenBerlin, and become a fan on Facebook.