How to save for retirement without an employer-sponsored retirement plan


Retirement planning might be essential for sustained financial health post-retirement. 

However, a recent study revealed that around 42% of people have less than $10,000 stocked away for retirement [1]

And it doesn’t help the situation that 41% of millennials do not have access to an employer-sponsored savings plan [2]

On top of that, 16 million from 150 million people in the US workforce identify as self-employed [3]. This potentially increases the percentage of the workforce that goes without a “company-managed” retirement plan.

And saving for retirement without an employer-sponsored retirement plan can be tough.  

Therefore, whether you are self-employed or work at a company that does not offer a retirement plan, it might be best if you start planning for your retirement soon. 

In this article, we are sharing a few retirement plans that may be better suited for your unique situation. Read till the end to make sure you don’t miss potential insight this article hopes to deliver. 

5 Ways You Can Potentially Save for Your Retirement

Retirement planning is among the biggest financial stressors for Americans [4]. The situation might be especially dire for people who have to go by without a company-sponsored plan. 

In this case, knowing your retirement planning options may help you take the first step towards saving for your post work life effectively. 

Here’s a list of retirement plans you can consider as you work towards building a post-work sustainability fund:

Individual Retirement Accounts (IRAs)

IRAs are designed explicitly for retirement savings and offer their own pros and cons. 

One of the most significant benefits IRAs can offer is the tax advantage. However, the downside to these accounts could be the annual contribution limit.

It is possible for every worker, whether employed or independent, to contribute to an IRA and build a retirement fund, although the pre-tax contribution advantage is not available to high income earners. 

However, you cannot withdraw money from an IRA before you are 59 ½ year old in most cases without not only paying tax, but also incurring a hefty penalty of 10% of the withdrawn amount [5]

There are various IRAs, and depending on your employment status and financial goals, one might be more suitable for you than the other. 

You might be able to choose a suitable IRA from:

Traditional IRA

The traditional IRA is great for people who want to contribute to retirement and save on taxes while doing so. 

Traditional IRAs allow tax-deductible contributions, and the qualified distributions you receive later on are taxed at the ordinary income tax rate. 

The amount you can deduct from your taxable income may vary [6]. So, make sure to do your homework or work with a financial professional to help determine the value of this option. 

As for withdrawal, traditional IRAs have a required minimum distribution. That means you will have to withdraw some amount by a certain age to avoid tax consequences and penalties [7]

Roth IRA

Roth IRA differs from the traditional IRA mainly on the basis of taxes. 

The contributions in Roth IRA are not tax-deductible. That means you pay your contributions with your after-tax salary. But the qualified distributions you receive are generally tax-free. 

This, for some people, can be a significant advantage. 

Another benefit Roth IRA offers is that it doesn’t have a required minimum distribution [8]. That means you can keep your money in your retirement account if you don’t need it. 

However, there are some income limitations for contributing to a Roth IRA [9]. So, you’ll have to consider them to confirm your eligibility before choosing this route. 

Traditional and Roth IRAs are often recommended for employed people who don’t have an employer-sponsored savings plan. 

However, the contribution limits to both IRAs are the same and pretty paltry. So you may have to consider other retirement options to complement your IRAs and build a sustainable retirement fund. 

The following IRA types are solely for the self-employed and small business owners. If you are not one of them, feel free to skip ahead. 

SEP IRA

A Simplified Employee Pension or SEP IRA is often recommended for freelancers and other self-employed individuals who have few or no employees working for them. 

The contributions you make to this type of IRA are tax-deductible, and the distributions you receive are taxed, much like a traditional IRA. 

The SEP IRA tends to have a higher contribution limit than traditional or Roth IRAs. It may also be combined with one of these IRAs to potentially increase your savings. SEP IRA also has required minimum distributions, so you have to start withdrawing money before a certain age [10]

Additionally, in most cases, you may not be able to withdraw your savings before you are 59 ½ without incurring tax penalties [11]

SIMPLE IRA

Savings incentive match plan or SIMPLE IRA is similar to SEP IRA except that employees can make contributions to their own investment accounts, and the employers have to contribute as well. 

The SIMPLE IRA has withdrawal rules similar to a traditional IRA.

All the contributions are tax-deductible, and the distribution incurs taxes. You can deduct the ones you make for yourself and what you make for your employees. This can also potentially push you into a lower tax bracket.

Real Estate Investment

IRAs might not be suitable for you either because of their contribution or income limitations, or your employment status. 

In that case, real estate investment might be a good option. 

If you have the funds or can finance your purchase, you can invest in a rental property or buy and sell real estate for potential profit. 

Financing might only be a good idea if you have enough time before retirement. 

The next best option might be to invest in real estate investment trusts or REITs, which may offer a lower entry threshold into the real estate industry, might be relatively passive and less risky than the two options we discussed earlier. 

Regardless of how you choose to enter real estate, know that this industry is more complicated than you may reckon. 

So, try and get as many tips on real estate investment as you possibly can before going this route. 

Make sure to do your research thoroughly with this option and even consider contacting a professional that deals with real estate transactions, to potentially reach a more viable decision. 

 Solo 401 (k)

Solo 401 (k) or one-participant 401 (k) is a retirement plan for single-person business owners who have no other employees. It closely resembles the regular 401(k) that employed individuals get at their companies. 

Couples running a business together may also qualify for opening and funding a solo 401(k) account [12]

You can contribute to this account as an employee and employer. This may push your contribution limit and potentially help you save more annually. 

With a solo 401(k), you can choose whether you want to go the traditional or Roth route and decide how you want to get your tax advantage. 

Choosing traditional 401(k), you can deduct your contributions from your taxable income and potentially lower your tax bill. But the qualified distributions you receive on retirement will be taxed in this case. 

On the other hand, you can contribute to a Roth 401(k) with your after-tax dollars. That means you should not have to pay more taxes when you withdraw your distributions (*certain restrictions apply). 

Brokerage Account

Opening a brokerage account might also be a potentially helpful option for you if you want to increase your investment or don’t qualify for any of the aforementioned options. 

With brokerage accounts, you invest in assets like stocks or mutual funds. 

These assets may generate income if you sell them or receive dividends on your stocks. 

Brokerage accounts do not have a contributions or income limit, and investors can withdraw funds whenever they want. Therefore, they tend to offer more flexibility than IRAs and 401(k)s. 

However, they might not offer as many tax advantages as IRAs and 401(k)s. You may incur some tax liabilities as your assets’ income might be taxable [13]

Financial professionals often recommend investing in non-qualified brokerage accounts when you have maxed out your IRAs or 401(k)s, if you have those. 

How Much Do You Need to Retire Comfortably? 

The figure you need to retire comfortably may depend upon the lifestyle you choose post-retirement. So, there’s no “magic number” that can answer this question. 

However, as a ballpark figure, financial professionals often recommend saving enough to receive 80% of your pre-retirement income regularly after you retire to maintain a similar lifestyle to when you used to work [14]

Plan for a Comfortable Retirement

A comfortable retirement becomes more likely with effective planning. 

It might help if you set a financial goal by deciding on a figure that you need to build before retiring.  

Once you have a financial goal, choose a retirement plan (or plans) that you think will help you get as close as possible to this goal. 

And if you are daunted by the subtleties involved in retirement planning, don’t give up. Consider talking to a financial professional instead and get your confusion sorted. 

At Dayton and Sydney, our experienced financial professionals help individuals like you with retirement planning. Talk to our financial professionals now to get the help you need building a customized retirement plan that aligns with your current financial situation and focuses on your future goals.  

 

Equitable Advisors, its affiliates and financial professionals do not provide real estate advice or services.  You should consult with a real estate professional regarding your specific situation if considering investing in real estate.

 

References

[1] “Survey finds 42% of Americans will retire broke—here’s why”, Cameron Huddleston, CNBC, April 11, 2018. 

[2] “Here’s how many Americans don’t have access to a 401(k) plan”, Emmie Martin, CNBC, March 12, 2018. 

[3] “The self-employed are back at work in pre-COVID-19 numbers, but their businesses have smaller payrolls”, Rakesh Kochhar, Pew Research Center, Nov 3, 2021.

[4] “Americans are more stressed about money than work or relationships—here’s why”, Emmie Martin, CNBC, June 26, 2018. 

[5] “Individual Retirement Account (IRA)”, Investopedia, Jan 3 2021. 

[6] “Individual Retirement Account (IRA)”, Investopedia, Jan 3 2021. 

[7] “Required Minimum Distribution (RMD)”, Elizabeth Blessing, Investopedia, Feb 17, 2022. 

[8] “Individual Retirement Account (IRA)”, Investopedia, Jan 3 2021.

[9] “Individual Retirement Account (IRA)”, Investopedia, Jan 3 2021.

[10] “What Is a SEP IRA? How SEP IRAs Work”, Arielle O’Shea, nerdwallet, March 5, 2022. 

[11] “What Is a SEP IRA? How SEP IRAs Work”, Arielle O’Shea, nerdwallet, March 5, 2022. 

[12] “Benefits of a Solo 401(k) for the Self-Employed”, Troy Segal, Investopedia, Dec 23, 2021. 

[13] “Brokerage Accounts Are Becoming More Popular – Here’s When You Should Open One”, Alicia Adamczyk, CNBC, Aug 27, 2019. 

[14] “How Much Do I Need to Retire?”, Jim Probasco, Investopedia, March 5, 2022. 

About Dayton & Sydney

Dayton & Sydney Wealth Strategies Group is a financial services company built on a legacy of hard work and customer service. As a member of the Elite Advisor Group, an internal recognition program of Equitable Advisors at the platinum plus level, we use a solid, innovative and long-term approach to help you accomplish your biggest dreams.

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