A 401(k) is most people's first choice for a retirement savings account because they can automate their contributions, and their employer might chip in as well. But for millions of workers, this isn't an option. Approximately 46% of workers don't have access to work-related retirement benefits, according to a recent American Advisors Group (AAG) survey.
This doesn't prohibit them from saving for their futures, but it does make it a little more difficult, because they can't rely on any assistance from their employers. If you're one of the 46%, preparing for retirement requires a little more planning and work on your part. Here's a guide to get you started.
Alternative retirement savings accounts
An IRA is what most people fall back on if they're not eligible for a 401(k). Anyone can open and contribute to one of these as long as they're earning some income during the year. Contribution limits are much lower for IRAs than for 401(k)s -- just $6,000 compared to $19,000 in 2019 ($7,000 and $25,000, respectively, for adults 50 and older) -- but IRAs give you more investment choices and usually carry lower fees.
You can choose between a traditional IRA, which is tax deferred, or a Roth IRA. Traditional IRA contributions reduce your taxable income in the year you make them, but then you must pay taxes on your distributions in retirement. A traditional IRA is best for those who think they're in a higher tax bracket today than they will be in retirement. Roth IRAs work the opposite way. Contributions don't reduce your taxable income this year, but then they grow tax-free. These accounts are better if you think you're in the same or a lower tax bracket today than you will be in retirement. You can also have one of each type of account, but note that the limits mentioned above apply to all of your IRAs, not to each individually.
A health savings account (HSA) is another smart place to stash your savings if you max out your IRA. It works similar to a traditional IRA, except money taken out for medical, dental, or vision expenses at any time is tax-free. You must have a high-deductible health insurance plan -- one with a deductible of $1,350 or more for an individual or $2,700 or more for a family -- in order to open an HSA. Individuals may contribute up to $3,500 in 2019, and families may contribute up to $7,000. Adults 55 and older are allowed an extra $1,000 in catch-up contributions.
Self-employed workers should explore a Simplified Employee Pension IRA (SEP-IRA). This account is similar to a regular IRA, but it's designed for those who are self-employed, and contribution limits are much higher than they are for regular employees. There are rules about mandatory contributions to any employee IRA, though, so it might not be ideal if you employ others.
How to save enough for retirement on your own
Not all employers that offer 401(k)s offer a match, but many do, and this can ease the burden of saving for retirement on your own. If your company doesn't offer a 401(k), you'll have to save comparatively more to cover your retirement expenses.
The first step is to figure out how much you need for retirement. Estimate the length of your retirement by subtracting your preferred retirement age from your estimated life expectancy, and plan to live a long life to be safe. Next, total up your estimated annual retirement costs and multiply that by the number of years of your retirement, adding 3% annually for inflation. Use a retirement calculator for this and to estimate how much your investments could grow over time. Start with a conservative 5% to 6% annual rate of return, though your investments could grow more quickly than this.
Your retirement calculator should give you the total amount you need to save overall and per month to hit your goal. Subtract from this any money you expect from Social Security to figure out what you need to save on your own. You can find your estimated Social Security benefit by creating a my Social Security account.
If your savings goal is beyond your reach, experiment with your retirement plan by delaying retirement or Social Security for a few years or by planning to cut back your expenses in retirement. You could also work on reducing your expenses today to free up more cash for retirement or try to boost your income by pursuing promotions, starting a side hustle, or switching employers.
Automate your contributions to your retirement savings accounts if you struggle to remember to make them on your own. If this is not an option, set reminders for yourself. Making regular contributions ensures you'll actually save as much as you're supposed to, whereas if you wait until the end of the year to make one large contribution, you might accidentally spend some of the money that was intended for retirement.
The above steps will get you started on creating a retirement plan, but if you need assistance, reach out to a fee-only financial advisor -- not a fee-based advisor who earns commissions, as this could create a conflict of interest. Your advisor can help you come up with a personalized investment plan tailored to your goals and timeline, and this can give you more peace of mind, knowing that you're on track for the retirement you want.