Planning for Retirement Without a 401(k)

About half of Americans don't have a 401(k) or pension.

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Darron Cardosa, 42, a waiter in New York puts 3 percent of his tips in an envelope with the letters IRA scrawled on the side at the end of each shift. "I made $183 the other day, so I put $6 in the envelope," Cardosa says. "I'm waiting until I get it up to $500 and then I will bring it over to the bank and put it in my IRA." One of Cardosa's previous server positions offered a 401(k) that he utilized, but his current job offers him no retirement benefits. "It is very frustrating for someone of my age, 42, with very little to count on when I am no longer able to work," he says.

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Workers with a 401(k) or pension plan at work are among the more fortunate half of the population. Only 51 percent of all Americans worked for an employer that sponsored a retirement plan in 2008, and according to an Employee Benefit Research Institute analysis of Census Bureau data. And just 40 percent of all workers utilized those retirement benefits. That works out to be 78 million people who work for an employer or union that does not sponsor a retirement plan and 94.1 million workers who don't make use of retirement accounts or pensions.

This lack of access to any sort of retirement plan at work is not a recent trend. Only about half of private sector workers have been offered any sort of employer-sponsored retirement plan in a given year between 1979 and 2008, according to a Center for Retirement Research at Boston College analysis. These numbers have almost certainly gotten worse since 2008. According to Internal Revenue Service data, 263,616 fewer people participated in a traditional pension in September 2009, compared to a year earlier, and 595,521 less workers now participate in 401(k)s and profit-sharing retirement plans.

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About a third of U.S. households are not covered by any sort of retirement plan other than Social Security throughout their entire working life, Boston College found. Many workers also jump in and out of retirement plan coverage throughout their career as they job hop between employers that do and don't offer 401(k)s. In theory, workers who consistently save for retirement in IRAs and other investments throughout their career can accumulate an admirable nest egg on their own. For example, a worker who saves $2,500 per year in an IRA between ages 25 and 65 and earns 4 percent annually would accumulate $247,066 upon retirement. But in reality, most people accumulate far less. "This idea of people putting in $2,000 a year on their own just doesn't happen," says Alicia Munnell, director of the Center for Retirement Research at Boston College. "Most people really do not save on their own."

Frequent job changers may find it especially difficult to save for retirement. Many companies have waiting periods before new employees can join the 401(k) plan. Retirement benefits also vary considerably among jobs. Private firms spend an average of 92 cents an hour on retirement benefits, compared to the $3.19 an hour state and local government workers received in 2009, according to Bureau of Labor Statistics data. Private-sector employer 401(k) and pension contributions range from $4.22 an hour at utility companies to just 9 cents an hour in the food service industry. Union jobs and employers with 500 or more workers generally paid out the highest retirement benefits in the private sector, averaging $2.42 and $2.17 an hour respectively. But workers can't take employer contributions with them when they leave a job until the money is fully vested. Retirement savers who haven't spent a specific number of years with the company may not be able to keep any or only a portion of their employer's 401(k) contributions.

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Workers without a 401(k) not only miss out on the employer match, but are far less likely to be planning and investing for retirement. While 61 percent of workers with 401(k)s claim to have a retirement strategy, only 40 percent of those without a 401(k) are actively planning to retire, according to a recent Transamerica Center for Retirement Studies and Harris Interactive online survey of for-profit workers. Employees with a retirement account at work generally start saving for retirement at age 28, two years earlier than those without a 401(k), the survey found.