When a 401(k) isn’t available, multiple alternatives exist for preparing financially for retirement. The options include individual retirement accounts, brokerage accounts, annuities, real estate, and small business investments. Understanding the purpose, structure, and risks of each option is crucial.
Although 401(k)s and 403(b)s are commonly used employer-sponsored retirement plans, they are not the sole pathways toward securing your retirement. Discover various strategies to effectively work towards your retirement savings objectives without relying on a 401(k). Here are some other options you can choose from.
Individual Retirement Accounts (IRAs)
Individual Retirement Accounts (IRAs) provide tax advantages for your investments. The primary types are traditional and Roth IRAs, differing primarily in tax implications:
- Traditional IRAs: You can deduct contributions in the year they are made, and withdrawals are taxed as regular income after age 59½. Early withdrawals incur a 10% additional tax.
- Roth IRAs: Contributions are not tax-deductible, but qualified withdrawals after age 59½ and with an account age of at least five years are tax-free. Pre-59½ withdrawals from a young Roth IRA may be subject to taxes and penalties based on the reason.
One drawback of traditional and Roth IRAs is their relatively low contribution limit. Additionally, high earners might be ineligible for contributing to a Roth IRA. In 2024, the maximum contribution is $6,500, increasing to $7,500 for those aged 50 or older. Consistent, early contributions are crucial due to the compounding effect.
Brokerage Accounts
Funded brokerage accounts offer opportunities to invest in various assets, including stocks, bonds, mutual funds, ETFs, REITs, CDs, and money market funds. While riskier investments like stocks have higher earning potential, they also carry greater loss potential. Bonds and CDs offer stability, and finding the right balance depends on your risk tolerance and retirement goals. Investment strategies often shift from high-risk to low-risk as retirement nears.
Tax-Deferred Annuities
Annuities provided by insurance companies blend tax deferral with diverse investment options.
Annuities include fixed, indexed, and variable options, each with distinct features.
- Fixed: Offers a steady interest rate.
- Indexed: Interest is linked to a specific index’s performance.
- Variable: Tied to underlying investments, subject to market fluctuations.
While annuity growth is tax-deferred, withdrawals in retirement are taxable. Annuities can also guarantee income for a defined period of life.
Real Estate Investments
Real estate investment trusts (REITs) within IRAs or brokerage accounts provide exposure to the real estate sector. Investing directly in real estate offers the possibility of an income stream during retirement. Owning a multi-family property allows you to reside in one unit while renting out others, reducing living costs. Selling or continuing to rent post-retirement generates income.
Investing in a Small Business
Small business investments, whether entrepreneurial ventures or silent partnerships offer uncapped profits and higher ROI potential. These investments carry inherent risks and require careful research. Profits depend on the business’s success, and due diligence is essential.
Bonds, certificates of deposit, and annuities are considered safe investments due to government and insurance company support. These products provide consistent income but generally yield lower returns than riskier options like stocks and ETFs. A balanced approach aligning with risk tolerance is advisable.
The Bottom Line
Achieving retirement goals without a 401(k) is feasible through various strategies. Seek guidance from a trustworthy financial advisor, especially when considering higher-risk investments. Regular portfolio rebalancing, considering evolving goals and risk preferences, is pivotal regardless of where funds are allocated.