How to Save for Retirement Without a 401(k)

Key Takeaways

There are other ways to save for retirement if you don't have access to a 401(k) at your place of work.
IRAs are easy to set up and manage, and they offer valuable tax advantages, whether you have a traditional or Roth IRA.
A brokerage account allows you to invest in a variety of securities, such as stocks, bonds, and mutual funds.
You can save and grow your money in an annuity, which can be purchased through an insurance company.
Investing in real estate and small business opportunities gives you the potential to grow your retirement nest egg.

Individual Retirement Accounts (IRAs)

IRAs are tax-advantaged accounts that hold investments you choose. The two main types of IRAs are the traditional and Roth IRAs. The biggest difference between the two is when you pay your taxes.

Traditional IRAs: You get to deduct your contributions the year you make them. Withdrawals are taxed as ordinary income when you start taking out money during retirement (after age 59½). You can make withdrawals before that age, but you will incur an additional 10% tax on the sum.
Roth IRAs: You don't get a tax break when you add money to the account. Qualified distributions are tax-free, as long as you make them after age 59½ and if the account is at least five years old since your first contribution. Keep in mind, that you can make withdrawals from a less-than five year old Roth IRA account while younger than age 59½, but depending on the reason, you could incur taxes and penalties on the withdrawal.

The biggest drawback to saving in a traditional or Roth IRA is the low contribution limit. And if you make too much money, you can't contribute at all to a Roth.

For 2023, you can stash away up to $6,500, or $7,500 if you're age 50 or older. For 2024, the amount increases to $7,000 and the catch-up contribution remains the same. If you are able to max out your IRA every year, you could end up with a tidy sum by the time you retire. Of course, due to compound interest, the sooner you start, the better.

Order your copy of the print edition of Investopedia's Retirement Guide for more assistance in building the best plan for your retirement.

Brokerage Accounts

If you have a funded brokerage account (a non-retirement account), you can invest in a variety of instruments including:

Of course, higher-risk investments like individual stocks have the potential to earn more than low-risk investments like CDs—but they also come with the potential of losing more money. Bonds, CDs, and money market funds are more conservative, but they provide a form of stability that's beneficial in the long run. The trick is to find a balance that you're comfortable with, and that will help you reach your savings goals, depending on what those look like for you.

There's no standard formula for deciding how much of your money to put in high-risk, high-reward investments. In general, however, most people taper off the risk as they get closer to retirement, when they have fewer years to recover from large losses. Still, people are living longer today, so just because you're in your 60s doesn't mean you need to sell your stocks.

Be sure to pay attention to account fees. Even tiny differences in fees can have a huge impact on your nest egg over time.

Tax-Deferred Annuities

Annuities offer another way to reach your retirement savings goal. Offered through insurance companies, annuities provide tax deferral coupled with varied investment opportunities. Annuities are available with any of the following:

A fixed interest rate
An indexed interest rate, based on the performance of a specific index
A variable rate, tied to the performance of the underlying investments

The money you stash in an annuity grows tax-deferred but becomes taxable once you withdraw money in retirement. In addition to tax deferral, annuities can provide a guaranteed income stream for a certain number of years or a lifetime.

Warning

Annuities aren't appropriate for every investor, so it pays to be cautious if you're considering one. They're only backed by the claims-paying ability of the issuing insurance company and there's no guaranteed investment performance. Annuities tend to be expensive, which means you may end up paying a lot in fees.

“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," James B. Twining, CFP, founder and CEO of Financial Plan, in Bellingham, Washington, said.

"These commission-based annuities are typically more expensive than other collective equity securities such as mutual funds and ETFs. It is not unusual to find annuities with total annual costs over 4% per year—a tremendous headwind that results in poor performance net of expenses," Twining said.

Annuities can allow you to protect your principal balance while providing you with the potential for income that is guaranteed for the remainder of your life. You may also choose to leave money to your beneficiaries with an annuity.

Real Estate Investments

Another way to save for retirement is a real estate investment. If you have an IRA or brokerage account, you may already have access to the real estate sector through a mutual fund or an ETF.

“The best option for investors is to buy into a fund that itself invests in real estate investment trusts (REITs) around the world,” Mark Hebner of Index Fund Advisors in Irvine, California, said. “REITs are extremely cost-effective, transparent, and liquid. Gaining access to REITs through a mutual fund allows investors to gain global diversification in real estate in a cost-effective way.”

Outside of REITs, you can buy real estate outright to generate an income stream during your retirement years. If you invest in a multi-family home, for instance, you can live in one section and rent out the other. This effectively reduces your total living expenses while paying down the mortgage.

Later, you can decide to continue to rent out the property and receive a steady income from rents. Alternatively, you can sell the (ideally appreciated) home and use the proceeds for living expenses or other investments.

Invest in a Small Business

A small business investment doesn't necessarily mean becoming a business owner. If you don't want to drive the ship, you can invest in an established company as a silent partner.

Whether you choose entrepreneurship or investing, small business profits are not capped and the potential return on investment (ROI) is higher than other alternatives. Of course, these investments carry with them a great deal of risk. There's no guarantee that the time or money you invest in a small business will generate a substantial return over time. As with any investment, do your homework before committing your hard-earned money.

Frequently Asked Questions (FAQs)

What if I Don't Have a 401(k)?

Even if you don't have access to a 401(k), there are many ways you can financially prepare for retirement. Without the support of an employer, you can invest your money through an individual retirement account or brokerage account, and you can put your money into annuities, real estate, or small businesses. Each option will prepare you differently for retirement, so it is important to understand the organization, purpose, and risk of each financial product.

What's an IRA?

The acronym IRA stands for Individual Retirement Account. These are tax-advantaged accounts that hold investments, and the two main types are traditional IRAs and Roth IRAs. With traditional IRAs, your contributions are tax-deductible but withdrawals are taxed as income during retirement, whereas with Roth IRAs, your contributions are not tax-deductible but withdrawals are not taxed as income during retirement. When withdrawals are made from a traditional IRA before you reach age 59½, they are subject to an additional 10% tax. When withdrawals are made from a Roth IRA before you reach age 59½ and are 5 years out from your first contribution, you may incur taxes or penalties depending on the reason for the withdrawal.

What Are Safe Investments for Retirement?

Bonds, certificates of deposit, and annuities offer guaranteed returns on investment supported by the government and individual insurance companies, so the products are considered safe investments which are beneficial for people seeking consistent income in retirement. While more reliable, these financial products may not provide as high of returns on investment as other products, such as stocks, money market accounts, and ETFs. Maintaining a balance between more- and less-risky investments can be a useful and productive retirement strategy for many people.

The Bottom Line

It is possible to save for retirement without a 401(k). When a 401(k) is not an option, you still have several ways to invest for your post-work years. It's always a good idea to work with a trusted financial advisor, especially if you opt for any higher-risk investments. And, no matter where you put your money, be sure to rebalance your portfolio regularly as your goals, risk profile, and time horizon change.