A recent survey from the American Association of Retired Persons (AARP) revealed that 57 million Americans don’t have access to a 401(k) or employer-sponsored retirement plan. That’s about 50% of working adults.
The AARP survey also found that Americans are 15 times more likely to save for retirement when they have a workplace plan. That may be why roughly one-third of Americans have virtually no retirement savings whatsoever.
While a job with a 401(k) or pension is ideal for retirement savings, that is just not in the cards for a lot of Americans. However, those without plans can still build their retirement nest egg; it just takes perhaps a bit more focus and commitment.
Here are three things you can do right now to start saving for retirement without a 401(k).
1. Invest in an IRA
An IRA, or individual retirement account, is the next best thing to a 401(k). While it does pale in comparison to the typical 401(k), which offers a company match and higher contribution limits, it is a must for the gig worker or those without access to a plan.
There are two different types: a traditional IRA and a Roth IRA The big difference between the two relates to taxes.
Contributions you make to a traditional IRA are tax deductible, and you are generally not taxed until you start making withdrawals, which you can do starting at age 59 1/2 without penalty. On the other hand, contributions to a Roth IRA are not tax-deductible, but withdrawals are generally tax-free after age 59 1/2.
IRAs also have limits on how much you can contribute per year. For 2024, the contribution limit is $7,000 per year for people under 50 and $8,000 per year for those over 50. Importantly, those with multiple IRAs can only contribute these totals spread across all their IRAs; you can’t contribute $7,000 or $8,000 to each IRA you have.
To make it easier, there are options available to have a portion of your payroll deducted every pay period and automatically put into your IRA. There are also SIMPLE IRAs, which employers can set up to allow their employees to contribute a portion of their paycheck, and the employer to offer a match. There are also some bills moving through federal and state legislatures that seek to make investing in an IRA easier.
It might be a good idea to meet with a financial advisor or bank representative for help in setting up the IRA that works best for you. However, you should n’t wait, as the longer you have to invest, the more you will benefit from compounding and capital appreciation of your investments.
2. Invest in your own portfolio
Depending on how aggressive you are and how long your time horizon is, it would be hard to accumulate all you need for retirement with an IRA alone. However, you’d be surprised at how much you can accumulate with a long runway. For example, if you are in your 20s and you invest $100 per month in your IRA and earn an average annual return of 10%, you would have about $555,000 after 40 years.
Of course, you can supplement that with Social Security, but it would also be a good idea to start your own investment portfolio. You can do this quite simply by investing in an exchange-traded fund (ETF) or a target-date fund. An ETF is a basket of stocks that trades like a single stock and typically mirrors a broad index like the S&P 500.
The S&P 500 has averaged about a 10% annual return over time, including reinvested dividends. Thus, if you put $500 into an S&P 500 ETF and invested $50 per month in it, you would have roughly $300,000 after 40 years. After 30 years, you would only have about $112,000, which illustrates the value of starting early.
To make it even easier, you could invest in a target-date fund, which most of the large asset management firms offer. Target-date funds are typically offered by the year you might retire. Thus, if you are aiming for a retirement date in 2050, you’d get a 2050 target-date fund, and the asset allocation will shift over time as you approach retirement. These funds invest more aggressively the farther out you are from retirement and more conservatively the closer you get to retirement to preserve your capital.
3. Invest in a health savings account
You might not think a health savings account (HSA) would be a vehicle for retirement savings, but it certainly could be. HSAs were created to allow people to put money away for medical expenses, and the withdrawals are tax-free as long as they are used for qualifying medical expenses.
You can get an HSA from leading money managers like Fidelity Investments. The contributions are invested in your choice of funds, so they can accumulate over time, like an IRA. Also like an IRA, there are annual contribution limits. For 2024, the limit is $4,150 for individuals and $8,300 for families. Those who are 55 and over can contribute $1,000 more per year.
Thus, HSAs certainly have value as a way to pay for medical costs, but the added benefit is that at age 65, you can withdraw the money in the account for any reason without penalty. You would only pay the federal income tax upon withdrawal after 65. If you have good healthcare coverage and don’t need the HSA, you could use the money you would have invested in an HSA to bolster your IRA or individual investment portfolio.
These aren’t the only retirement-savings solutions available to Americans without an employer-sponsored plan, but they are very simple to use and can result in a sizable nest egg over time. Above everything else, the key is to start early — and if you don’t have any savings, start now.
