Can You Retire Without a 401(k)?
Whether your dreams for retirement include cruise ships or quiet days at home, building a solid nest egg is key. When most people think about retirement savings, they focus on their 401(k). In fact, 401(k) and other employer-sponsored retirement plans are the most commonly used tools for retirement planning.
However, a substantial percentage of American workers don't have access to a 401(k) plan. If a 401(k) isn't an option for you, there are still tools you can use to save for retirement, such as individual retirement accounts (IRAs) and annuities.
Why many Americans may not have access to a 401(k)
Although 401(k) plans are popular, not everyone can use one. According to data released by the Economic Innovation Group, approximately 41% of Americans lack access to a 401(k) or other employer-sponsored retirement plan. There are several reasons for that:
Their employer doesn't offer a plan
401(k) plans are tied to your employment. You cannot open one by yourself.
Not all companies offer employer-sponsored retirement plans like 401(k) or 403(b) plans. That's especially true for small businesses. According to the Pew Research Center, about 40% of small businesses do not offer retirement benefits.
They’re self-employed
If you're a self-employed freelancer, independent contractor or small-business owner, you may not have a large enough business to justify the cost of opening a 401(k) plan for yourself, as the administrative costs for employers can be high.
However, you can still save in a solo 401(k) or Simplified Employee Pension IRA (SEP IRA).
Their career path hasn’t allowed a plan
If you worked part time or took time off from work to be a stay-at-home parent or caregiver, you may not have access to a retirement plan (or you may not have met your employer's eligibility requirements).
Those gaps are common, and they don't mean you're unable to save. There are several tools you can use to save for your retirement beyond a 401(k).
Retirement savings options beyond 401(k) plans
The good news is that there are multiple ways you can save for retirement outside of a 401(k). Depending on your finances and how long you have until you plan to retire, you may use one or a combination of the following tools:
Annuities
An annuity is a contract between you and an insurer. You pay the company a lump sum or a series of payments and, in exchange, the insurer commits to giving you a steady stream of income in the future.
Annuities can provide a guaranteed income, and you can choose to start receiving payouts immediately or at some point in the future (such as 10 or 20 years from now).
You can fund an annuity in several ways, including money from your checking or savings account, investments, retirement accounts, or even an inheritance.
Individual retirement accounts (IRAs)
Unlike 401(k) plans, which are tied to your employer, IRAs are retirement plans you can open on your own. IRAs don't have the benefit of employer matching contributions, but they have other advantages. There are two main types:
- Traditional: Your pre-tax dollars grow on a tax-deferred basis. And, if you don't have access to an employer-sponsored retirement plan, your contributions may be tax-deductible.
- Roth: With a Roth IRA, you contribute with post-tax dollars. Your contributions aren't deductible, but there are upsides: Your after-tax contributions grow tax-deferred and, when you start taking withdrawals in retirement, the account distributions are free of ordinary income tax. However, there are income restrictions for Roth IRAs.
Investment accounts
When it comes to investing for retirement, 401(k) plans and IRAs are popular because of their tax benefits like tax-deductible 401(k) contributions or tax-free withdrawals. But, they do have some limitations. You can't withdraw money until you reach a certain age. Otherwise, you'll have to pay income taxes and early withdrawal penalties.
An alternative (or supplemental approach) to consider is to open a brokerage or individual investment account. These accounts allow you to invest in a broad range of investment options, including stocks, bonds, mutual funds, exchange-traded funds and other securities.
They don't have the tax benefits of a 401(k) or IRA, but you can withdraw money at any time, for any reason, without penalty. While investment accounts can be a useful part of your retirement strategy, keep in mind that you'll pay taxes on your earnings (and, if your money was only invested for a short time, you'll pay the IRS short-term capital gains taxes).
Other options
There are other, lesser-known options for saving for retirement, including:
- Certificates of deposit (CDs): CDs are a type of bank account where you deposit a lump sum and commit to leaving it untouched for a certain period, such as five or seven years. In return, the bank pays you a fixed rate of interest. A CD is a low-risk tool, but some investors or retirees may find it's better to use a CD as a supplemental tool due to their low interest rates compared to your potential returns in the stock market. A multi-year guaranteed annuity (MYGA) offers features comparable to CDs and may be a good option for those approaching retirement.
- Permanent life insurance: Permanent life insurance policies, such as whole life insurance, can build cash value. And, you have the peace of mind of knowing your beneficiary will receive a death benefit if you pass away while the policy is in effect.
- Health savings accounts (HSAs): HSAs are a special kind of tax-advantaged account for those with high-deductible health plans. They allow you to make pre-tax contributions, offer tax-deferred growth, and, if you make withdrawals for qualifying purchases, you can make withdrawals without paying income taxes.
Maximizing your retirement income
Building a strong retirement income plan isn't just about saving money — it's also about using the right tools. If you don't have a 401(k), you'll need to utilize other options to save and invest for the future.
Consider how other retirement saving tools, such as IRAs or annuities, will work with and complement other benefits, such as your Social Security retirement benefits or a pension. For example, delaying Social Security until you reach the full retirement age (or later) can help you get a larger benefit amount in retirement, but you'll need to consider how you'll handle any funding gaps between your retirement date and when you start receiving Social Security benefits. That's where other tools, like annuities or an individual investment account, can come in handy.
Creating a mix of income sources that provide stability and investment growth is key to retirement planning. If you need help deciding which retirement tools are best for you or how much you need to save to achieve your goals, meet with a financial advisor or certified financial planner for personalized guidance.
This story was created in partnership with Money.com.
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