While it's fairly common for individuals to rely on 401(k)s and 403(b)s for their retirement savings, these employer-provided plans are not the only resources available. Let's explore the distinct ways to reach your retirement savings ambitions even without a 401(k) in place.
Unique tools such as Individual Retirement Accounts (IRAs) offer tax benefits and hold your chosen investments. You might have heard of the Traditional and Roth IRAs; the major discernment between them lies in the tax payment timeline. The downside to these two, however, is their relatively low contribution limit - and high income earners can't contribute to a Roth IRA at all.
Next year, for instance, you can save up to $6,500, or $7,500 if you're 50 or above. In 2024, the sum jumps to $7,000, but the catch-up contribution remains the same. If you manage to maximize your IRA contributions consistently, you can amass substantial retirement savings. And remember, it's always advantageous to start investing early due to the compound interest phenomenon.
Leveraging a funded brokerage account – a non-retirement account – can also aid your retirement journey. You have the option to invest in multiple instruments. Naturally, higher-risk investments like stocks could potentially lead to higher earnings, but they also pose increased risk of losses. Bonds, CDs, and money market funds serve a more conservative approach, but with crucial stability that favors your long-term strategy. The challenge is to strike a comfortable balance that propels you towards your financial goals.
It's not uncommon for individuals to pull back from high-risk investments as they approach their retirement years to safeguard against large losses. However, with extended life expectancy nowadays, selling your stocks just because you're in your 60s might not be a sound strategy. Always be mindful of account fees as even minor variations can make a significant difference to your retirement corpus over time.
Annuities offer yet another route to reach your retirement savings target. Annuities come via insurance companies and gift you with tax deferral and diverse investment opportunities. The key to remember about annuities is that your money grows tax-deferred and becomes taxable only when you start to withdraw funds in your retirement. In some cases, annuities might not be the right choice for investors due to the assertion that they are backed by the issuing insurance company’s claims-paying ability, and they come with no guaranteed investment performance. James B. Twining, CFP, founder, and CEO of Financial Plan, shares his perspective: “Annuities are contracts with life insurance companies, and there is a long history of manipulative insurance agents selling annuities for the large commissions they earn, rather than for the benefit of the investor. Annuities may be pricey which indicates you may be paying quite an amount in fees.”
Another alternative to consider for retirement savings is real estate investment. You might already have exposure to the real estate sector via a mutual fund or ETF if you have an IRA or brokerage account. “The best option for investors is to buy into a fund that itself invests in real estate investment trusts (REITs) around the world,” says Mark Hebner, Index Fund Advisors. “REITs are incredibly cost-effective, transparent, and liquid. Diversifying globally in real estate through a mutual fund is an economical strategy.” Contingent on the arrangement, real estate investments can often generate a steady income during your retirement years.
Investing in a small business doesn't necessarily mean becoming a business owner yourself. Even as a silent partner in an established company, there's a potential for higher returns on investment. However, these investments carry significant risks, and success is not guaranteed. As with any investment, diligence always pays off.
Despite lacking access to a 401(k), there's no shortage of ways to financially prepare for retirement. Be it through an individual retirement account, a brokerage account, annuities, real estate, or small businesses – you have the power to prepare for retirement at your fingertips. However, always keep tabs on your portfolio and rebalance it regularly as your goals, risk tolerance, and time horizon evolve.