You Quit Your Job, but You Still Need a Retirement Plan

When she realized she wanted to quit her job at a San Francisco software company, Anna Rider was taking care of two babies: a food blog that she wanted to grow, and her actual child — the son she had five months ago.

So Ms. Rider left, becoming one of the tens of millions of Americans who gave their notice in the past year and joining the cultural moment that has come to be known as the Great Resignation.

She not only gave up her regular income but stopped saving for retirement consistently. She knows that choice came with some risk.

“As someone who has been future-focused my whole life, including saving for retirement, I’m grateful I can borrow from my future self to fund my present ability to take care of my son,” said Ms. Rider, 32, who moved with her husband to Boulder, Colo., in 2019.

With a spouse who is employed and some side income from her blog, her risk is cushioned. Her plan is to resume saving for retirement when her income from the blog, Garlic Delight, triples (it brought in $10,000 last year). At her job, she was able to save 60 percent of her income, thanks to having no student loan or credit card debt and her husband’s earnings.

Ms. Rider concedes that it’s clearly easier to save for retirement when you have a full-time job. “When you’re working for someone, the mind-set for saving for retirement is different,” she said. “I can put money away because I know I have more money coming in next month.”

Employer-sponsored retirement plans are available to 68 percent of private-industry workers and 92 percent of state and local government employees, according to the Bureau of Labor Statistics. But without such a plan and an employer’s matching contribution, the estimated 47 million Americans who walked away from jobs in 2021 might find themselves short on retirement funds down the road if they don’t go to another job with a savings plan right away.

“There are a lot of variables to consider, so it’s almost impossible to spell out how much is being left on the table each year by each person not participating in a 401(k) plan,” said Nevin E. Adams, chief of content officer and head of research at the American Retirement Association.

An employer-sponsored 401(k) plan allows workers to save more for retirement (up to $20,500 a year for 2022, and an additional $6,500 for people over 50) than an individual retirement account, which permits $6,000 a year in savings for people under 50 and $7,000 for those above.

“An I.R.A. isn’t as good a deal as a 401(k), and you don’t get a company match,” Mr. Adams said.

Another complicating factor: People are less likely to save for retirement once they quit their job because money isn’t automatically being deducted from their paycheck and deposited into a retirement savings account.

“Workers are 12 to 15 times more likely to save for retirement if they have a plan at work than if they don’t,” Mr. Adams said.

The longer people wait to save for retirement, however, the less opportunity their account has to grow via compound interest or to benefit from a rise in the stock market.

“The penalty for not saving for retirement might be working more years, or your postcareer life might not be as luxurious as you had hoped,” Mr. Adams said.

Cynthia Meyer, a financial planner and principal with Real Life Planning in Gladstone, N.J., sees no harm in entrepreneurs like Ms. Rider waiting a year or two to start saving again for retirement.

“It’s OK to cut yourself some slack during the first year or two when you’re making the transition, but consider it your responsibility to provide yourself with self-employee benefits,” she said.

Like Ms. Rider, many of the people who quit their jobs have dreams of starting their own businesses. About 5.4 million new business applications were filed in 2021, a substantial increase from 4.4 million in 2020, according to the Economic Innovation Group, a bipartisan public policy organization.

The goal should be to start saving for retirement as quickly as possible, especially for someone new to the work force, Mrs. Meyer said. “Each dollar that you’re contributing at age 30 would be worth $17 by age 67,” she said.

Choose the right savings option

When you’re not contributing to an employer-sponsored retirement plan, there are several retirement savings options to choose from. Which type of account you should open depends on whether it’s more beneficial to have the tax deduction now or to get a tax-free distribution from the account at retirement, said James Lee, founder and president of Lee Investment Management in Saratoga Springs, N.Y.

A traditional I.R.A. allows you to deduct your contribution now and pay taxes on the withdrawal later. A Roth I.R.A. requires you to pay taxes on the money you contribute but allows you to withdraw money tax-free at age 59½. Both I.R.A.s can grow annually through compounding even when you don’t make a contribution.

“For someone who doesn’t have a high tax burden because they’re just starting a new business and it’s taking time to get it going, the tax deduction from a traditional I.R.A. isn’t as valuable,” said Mr. Lee, who is also the president-elect of the Financial Planning Association.

One of the most overlooked retirement savings accounts is a health savings account, Mr. Lee said. Anyone with a high-deductible health insurance plan can open an H.S.A. and in 2022, can save up to $3,650 a year, or $7,300 for family coverage, and there’s a $1,000 catch-up provision for people over 55. Contributions are tax deductible, and if you take the money out for a qualified medical expense, you won’t be taxed on it, Mr. Lee said. After age 65, you can take money out for any reason, but if the money isn’t used for a qualified medical expense, you will have to pay income tax on its growth, he said.

“However, most people over 65 do have qualified medical expenses, such as Medicare premiums,” Mr. Lee said. “It’s a great way to be able to save for future retirement expenses, especially health-related expenses, in a tax-free way.” To get the maximum benefit from the account, however, it’s best to save and invest the funds rather than using the money the same year the contribution was made, he said.

Self-employed business owners who want to save more than $6,000 a year can choose between two retirement savings accounts created for sole proprietors. For 2022, a Simplified Employee Pension plan (SEP I.R.A.) allows contributions of up to 25 percent of income or $61,000 for 2022, while a solo 401(k) allows contributions up to $20,500. With either retirement account, contributions are tax deductible and will reduce your taxable income. The only requirement for the solo 401(k) is an employer identification number, which is easy to obtain through the Internal Revenue Service.

If you’ve been contributing to an employer-sponsored retirement plan before you quit, you could leave your account where it is (and possibly pay administrative fees), or you can roll it over into an I.R.A. If you plan to find another job, you might want to wait and transfer it into your new employer’s retirement plan, assuming one is offered. You also have the option of cashing out your 401(k) but you’ll be charged a 10 percent tax penalty in addition to paying income tax on the total amount because the account was funded with pretax dollars.

Determine how much to save

Saving for retirement when you’re trying to build a new business and pay your monthly bills can be tricky.

Before you open a self-directed retirement account, Mrs. Meyer recommends, make sure there is enough income to pay monthly bills, including health insurance premiums, and save at least $1,000 in cash to pay for any unexpected expenses without using credit cards. Once those basics are covered, it’s time to save for retirement, even if it’s just a small amount of money each month.

“Psychologically, it can be challenging to tie up your money in a longer-term investment when you’re just starting a new business,” said Kristen Anderson, the chief executive and co-founder of Catch, an app that helps users save for retirement by automatically depositing a percentage of their income into an I.R.A. The idea is to recreate the experience that users are accustomed to with an employer-sponsored plan without locking them into saving a specific dollar amount each month.

When Keagan Schmidt of Hopkins, Minn., quit her job as a financial adviser in October to work for DeeperThanMoney, an online financial literacy start-up that doesn’t offer employee benefits, she and her husband, Derek, each opened a Roth I.R.A. The couple, both 27, set up their I.R.A.s to get a $500 deposit from their joint checking account at the beginning of each month. The goal is for each to save $6,000 this year.

“With no 401(k), I have resorted to maxing out my Roth I.R.A., first and foremost,” Mrs. Schmidt said.

However, she recognizes that some months they might need to reduce their I.R.A. contributions to pay their bills. “Doing something is better than doing nothing, and it is always easy to change the monthly amount,” she said. Mr. Schmidt has already reduced his contribution to his employer-sponsored 401(k) plan and is saving just enough to get the employer match.

“I am not worried if I am not saving as much for retirement for a year or two,” Mrs. Schmidt said. “Retirement saving is a long-term game, and even just continuing to save slowly is better than not at all.”