How to Save for Retirement if You Don’t Have a 401(k)
When Sarah Frueh, 27, was offered a job at a tech startup, the fact that the small company didn’t have a 401(k) was something that she initially worried about. But the job was a great opportunity for her, and she found that she couldn’t turn it down.
“I knew I could find another way to save,” she said.
Many people don’t have a 401(k)—often because they’re self-employed or the company they work for doesn’t offer one. While that can make saving for retirement more complex, there are a number of ways to ensure that your savings are on track if you find yourself without an employer-sponsored plan.
Leslie Wood, a wealth management advisor with Northwestern Mutual, works with many clients who are saving without a 401(k). The biggest challenge he sees is that people often don’t know how best to invest their savings. That’s why it’s so important, Wood says, that people understand their options.
Your Retirement Savings Options
Many people who can’t save for retirement in a 401(k) open an individual retirement account (IRA). An IRA allows you to put money aside for retirement and get a tax deduction for your contributions, but there are some limitations to saving in an IRA.
“You’re subject to low contribution limitations with an IRA,” said Wood. “For 2017, for example, the maximum contribution is $5,500, whereas the maximum contribution to a 401(k) can be up to $18,000 individually with your employer also able to contribute on top of that.”
If you’re a sole proprietor, Wood suggests you look into a self-employment plan (SEP) IRA since it has higher limits. It allows business owners to contribute up to 25 percent of their income or $53,000, whichever is less.
Another option for saving for retirement is a Roth IRA. You won’t get a tax deduction on your contribution to a Roth IRA, but the money in your account grows tax free and you won’t be taxed when you take it out.
“You have to be earning less than $186,000 per year if you’re married and filing jointly, or less than $118,000 per year if you’re a single filer, in order to qualify for the Roth. But you’ll still be able to contribute only $5,500 total across your IRAs,” Wood said.
Frueh has both a Roth IRA and a traditional IRA. “I’m maxing out my IRAs, and that comes out to about 10 percent of my total annual income,” she said. But she’s also looking for ways to save more.
Wood suggests that those who want to put aside more money consider opening a regular investment account or other alternatives like permanent life insurance. “If there is already a need for life insurance, then it may be worth considering a permanent life insurance policy,” he said. “With permanent life insurance, on top of the insurance protection, the policy accumulates a cash value that’s guaranteed to grow and does so on a tax deferred basis.”
Get an Advisor
If you’re saving for retirement on your own, it can be extremely helpful to work with a financial professional. Wood says that he often has people come into his office who have tried to manage their retirement plans on their own, and their savings and investments are not in good shape.
“It’s not uncommon for people who haven’t worked with an advisor to be invested in a way that does not line up with their age, risk tolerance or time horizon,” he said. “It’s important that their retirement plan be consistent with their overall financial plan, and often it isn’t. Had we been able to work with that client earlier, we could have made some changes that would have resulted in them having more money to retire with.”
Choose Your Investment Strategy
When you’re investing outside a 401(k), it is important to spend some time choosing your investment strategy since there can be more options to choose from.
“You have to consider how much risk you are comfortable taking,” said Wood, “as well as what other assets you have available for retirement income, how long you will work and whether you have a spouse who has a retirement plan.”
If you don’t have an advisor to help you do that, he suggests you consider an age-based portfolio that adjusts your risk tolerance as you age. He also recommends that you invest in multiple kinds of assets.
“Don’t put everything in your IRA,” he said. “It’s important to have other buckets that you can draw from in case there is a down year in the market.”
When you save for retirement in a 401(k), your contribution is automatically taken from your paycheck. Wood often sees those who don’t have a 401(k) save whatever is left at the end of the month. But, said Wood, “it’s important to make saving for retirement a priority. Making a retirement contribution should be the first thing you do with your paycheck.”
One way to do that is to set up an automatic contribution to an IRA or another retirement or savings account. If you’re able to remain consistent in your savings, not only will you be better off when it’s time to retire, but you’ll also feel better now.
Because she was proactive about saving, Frueh feels confident that she’ll be able to have a great retirement. “I’m very happy with the way my savings are shaping up,” she said. “I should have a solid amount of money saved by the time I retire.”