How to Save for Retirement Without a 401(k) Plan

Many individuals lack access to a 401(k) plan, whether due to self-employment or working for an employer that doesn’t offer such benefits. However, alternative retirement savings strategies can ensure financial security in later years.

Several options beyond the traditional 401(k) provide flexibility and, depending on financial circumstances and risk tolerance, may even yield greater returns.

Individual Retirement Arrangements

Individual Retirement Arrangements (IRAs) are a versatile option for saving for retirement without a 401(k). Traditional IRAs allow pre-tax contributions, reducing taxable income for the year. Contributions and earnings grow tax-deferred until withdrawal at retirement. In 2024, individuals under 50 can contribute up to $6,500, with an additional $1,000 allowed for those 50 and older.

Roth IRAs, funded with after-tax dollars, offer tax-free growth and withdrawals during retirement if conditions are met. This can benefit those expecting to be in a higher tax bracket later. Contribution limits are the same as Traditional IRAs but are subject to income thresholds. In 2024, single filers with a modified adjusted gross income (MAGI) of up to $153,000 can contribute fully, with a phase-out range up to $168,000.

For self-employed individuals, a Simplified Employee Pension (SEP) IRA may be appealing. SEP IRAs allow contributions of up to 25% of net earnings or $66,000 in 2024, whichever is lower. This is especially useful for small business owners or freelancers with variable incomes.

Self-Employed Plans

Self-employed individuals face unique challenges in retirement planning but have several tailored options. One is the Solo 401(k), designed for business owners without employees other than a spouse. This plan allows both employee and employer contributions, with a combined maximum limit of $73,500 for those aged 50 and above in 2024. The ability to contribute in dual roles offers flexibility, especially in high-income years.

Another option is the Savings Incentive Match Plan for Employees (SIMPLE) IRA. While often associated with small businesses, self-employed individuals can also use this plan. SIMPLE IRAs are less administratively complex and allow contributions of up to $16,000 in 2024, with a $3,500 catch-up contribution for those 50 and older. Employers, including self-employed individuals, must either match contributions up to 3% of net earnings or make a 2% nonelective contribution.

A Defined Benefit Plan may suit those seeking higher contribution limits. Contributions are determined by retirement income goals, age, and earnings, often exceeding other plans’ limits. However, these plans require long-term commitment and actuarial calculations, making them more complex and costly. Despite this, the tax benefits—tax-deductible contributions and tax-deferred growth—can be substantial.

Brokerage Accounts

Brokerage accounts provide a flexible alternative for retirement savings, offering control not found in traditional plans. Unlike tax-advantaged accounts, they impose no contribution limits or early withdrawal penalties, allowing investments to align with financial goals and timelines.

Investors can select from a wide range of assets, such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs). This variety enables tailored investment strategies to match risk tolerance and objectives. For instance, dividend-yielding stocks can provide passive income, while a mix of bonds or index funds balances risk. Diversification can enhance returns while managing risk in volatile markets.

Tax considerations are key. While contributions use after-tax dollars, dividends, interest, and capital gains are taxable. Holding investments for over a year qualifies for lower long-term capital gains rates, ranging from 0% to 20% in 2024, depending on income. Tax-loss harvesting can further offset gains, reducing taxable income and improving net returns.

Real Estate Investments

Real estate offers a tangible and potentially profitable way to diversify retirement savings. Rental properties can generate consistent cash flow, providing income during retirement. Depreciation deductions often reduce taxable income, enhancing returns.

Real Estate Investment Trusts (REITs) offer exposure to real estate markets without the responsibilities of managing properties. REITs provide a diversified portfolio of income-generating properties and are often traded on stock exchanges, offering liquidity. Many REITs distribute dividends, creating an additional income stream to supplement other savings.

Fixed or Variable Annuities

Fixed and variable annuities offer structured income in retirement, appealing to those seeking stability or growth potential outside traditional accounts. These insurance products provide regular payments in exchange for an upfront investment, helping mitigate the risk of outliving savings.

Fixed annuities provide guaranteed returns at a set interest rate, offering predictability. For example, a fixed annuity might yield a 4% annual return, unaffected by market fluctuations. However, their lower growth potential may not keep pace with inflation.

Variable annuities tie returns to the performance of underlying investment options, such as mutual funds. Policyholders can allocate premiums across asset classes, potentially achieving higher returns. However, this introduces market risk—poorly performing funds can reduce an annuity’s value. Optional riders, such as guaranteed minimum income benefits, can offer protection but often come with added fees.

Certificates of Deposit

Certificates of Deposit (CDs) are a low-risk option for those prioritizing safety and guaranteed returns. Offered by banks and credit unions, CDs require a fixed deposit for a specified term, with higher interest rates than standard savings accounts.

A five-year CD with a 5% annual percentage yield (APY), for example, ensures predictable earnings. This can help retirees plan for milestones like healthcare expenses. Additionally, CDs are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per institution, offering security against losses.

However, CDs lack liquidity, as early withdrawals often incur penalties. To address this, investors can use a CD laddering strategy, purchasing CDs with staggered maturity dates. For example, investing in one-year, three-year, and five-year CDs simultaneously provides periodic access to funds while benefiting from higher long-term rates.