A 401(k) plan may be ideal when it comes to saving for retirement. Still, it’s possible to meet ambitious retirement goals even without one. If your employer doesn’t offer retirement benefits, the following options can help you retire comfortably.
Invest in an individual retirement account
There are two main types of tax-advantaged individual retirement accounts: traditional IRAs and Roth IRAs. These are your best options for growing your retirement savings without a 401(k), but they have a big disadvantage: if you earn too much, you can’t contribute at all. Additionally, there are annual contribution limits shared by both traditional and Roth IRAs. These limits change every year, so make sure to check the IRS website to stay up to date.
In an article for The Balance, financial expert Miriam Caldwell says that with a traditional IRA, “your contributions are tax deductible, and the money grows tax-free…You pay income taxes when you take the money out in retirement.” On the other hand, contributions to a Roth IRA are not tax deductible, and you won’t be taxed on earnings or withdrawals. Caldwell advises investing in a Roth IRA if you expect to be in a higher tax bracket when you retire, and investing in a traditional IRA if you expect to be in a lower tax bracket.
Use a brokerage account
If you have maxed out an IRA and still have money to put toward retirement, consider funding a brokerage account for investing in stocks, bonds, mutual funds, and other instruments. “These accounts don’t offer any tax advantages such as deductible contributions or tax-free growth,” Rebecca Lake, finance journalist, writes in an article for Investopedia. “But you have a shot at earning better returns than you would by parking your extra cash in a regular savings account.”
Making investments is all about finding a risk-reward balance with which you are comfortable. Generally, people make higher-risk investments, like in individual stocks, early on in their lives — while they still have many years to recover from losses. As you get closer to retirement, more stable investments become more appealing, like bonds and certificates of deposits. No matter what, make sure your portfolio is highly diversified.
Explore other investment options
There are many other investment options that can help you save money for retirement. Some are minor. For example, you can make tax-deductible contributions to a Health Savings Account, and you can withdraw the money from your HSA at any time without any penalties or other taxes, as long as the funds are used for qualified medical expenses. After age 65, the funds are not restricted to medical costs, so an HSA can potentially be a major source of income in retirement if you don’t incur large medical expenses before then.
Other options are potentially lucrative but risky, such as investing in a small business as a partner. Because profits are not capped, the return on investment can be high. Even better, start-up companies may offer stock options. “That can allow you to benefit from the growth of the company in the first few years. It can be a good option when it’s managed right,” Caldwell says. However, there’s no guarantee that your invested money will generate a substantial return.
If you do not have the option to invest in an employer-matching 401(k) account, your next-best option is to save for retirement using an IRA. After that, you have various options that may or may not suit you depending on your means and risk aversion. Consult with a certified financial planner at your local financial institution to build a retirement strategy that works for you.