A recent survey by the American Association of Retired Persons (AARP) found that 57 million Americans lack access to a 401(k) or employer-sponsored retirement plan, representing about 50% of the workforce. The survey also revealed that people are 15 times more likely to save for retirement when they have a workplace plan, which may explain why roughly one-third of Americans have little to no retirement savings.
While having a job that offers a 401(k) or pension is ideal for retirement savings, it’s not an option for many. However, those without such plans can still build a retirement fund with some additional focus and commitment.
Here are three strategies to start saving for retirement without a 401(k):
1. Invest in an IRA
An Individual Retirement Account (IRA) is a great alternative to a 401(k). While it might not match the benefits of a 401(k) — such as company matches and higher contribution limits — an IRA is essential for gig workers or those without access to an employer-sponsored plan.
There are two main types of IRAs: traditional and Roth. The key difference between them lies in taxation. Contributions to a traditional IRA are tax-deductible, and taxes are deferred until withdrawals begin at age 59½. In contrast, contributions to a Roth IRA are not tax-deductible, but withdrawals are generally tax-free after age 59½.
IRAs have annual contribution limits. In 2024, the limit is $7,000 per year for those under 50 and $8,000 for those over 50. These limits apply across all IRAs you own, so you cannot contribute the full amount to each account individually.
Some employers offer SIMPLE IRAs, allowing employees to contribute a portion of their paycheck, often with an employer match. To make saving easier, you can set up automatic payroll deductions directly into your IRA. Consulting a financial advisor or bank representative can help you choose the best IRA option for your needs. Starting early is crucial, as it allows more time to benefit from compounding and capital appreciation.
2. Build Your Own Investment Portfolio
Depending on your risk tolerance and time horizon, an IRA alone might not be sufficient to meet all your retirement needs. However, with a long-term approach, significant wealth can be accumulated. For instance, investing $100 per month in an IRA at an average annual return of 10% could grow to approximately $555,000 after 40 years.
In addition to Social Security, consider starting your own investment portfolio. A simple way to do this is by investing in an exchange-traded fund (ETF) or a target-date fund. ETFs are baskets of stocks that trade like a single stock, often mirroring broad indices like the S&P 500, which has historically averaged a 10% annual return.
If you invest $500 initially in an S&P 500 ETF and then add $50 monthly, you could accumulate about $300,000 after 40 years. The value of starting early is clear, as the same investment would only grow to approximately $112,000 over 30 years.
Alternatively, target-date funds, which adjust their asset allocation over time, can be a convenient option. These funds start with a more aggressive investment strategy when retirement is far off and gradually shift to a more conservative approach as retirement nears.
3. Utilize a Health Savings Account (HSA)
While not typically seen as a retirement savings vehicle, a Health Savings Account (HSA) can be beneficial in this regard. HSAs are designed to help people save for medical expenses, with tax-free withdrawals for qualified medical costs.
Available through major financial institutions like Fidelity Investments, HSAs allow you to invest contributions in your choice of funds, much like an IRA. For 2024, the contribution limits are $4,150 for individuals and $8,300 for families, with an additional $1,000 allowed for those 55 and older.
HSAs are useful for covering medical costs, but they offer an added advantage: at age 65, you can withdraw funds for any reason without penalty, paying only federal income tax on the withdrawal. If your healthcare coverage is adequate and you don’t need the HSA, you could redirect those funds to bolster your IRA or personal investment portfolio.
These strategies are straightforward and can lead to a significant retirement fund over time, even without an employer-sponsored plan. The key is to start saving as early as possible — and if you haven’t started yet, now is the time.