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10 Ways to Retire a Millionaire Without a 401(k)

By Kailey Hagen - Jun 30, 2021 at 7:00AM
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10 Ways to Retire a Millionaire Without a 401(k)

You don't need a 401(k) to retire comfortably

A 401(k) is one of the best retirement savings accounts available. It offers high contribution limits, tax-advantaged growth, and in some cases, the opportunity to earn an employer match. But not everyone has access to a 401(k) through their jobs.

Fortunately, it's still possible to save enough for retirement without one of these accounts. But it requires a little creativity. Try these strategies to put yourself on the path to millionaire status, no 401(k) necessary.

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1. Use an IRA

An IRA is the logical alternative to a 401(k) for retirement savings. You can open and contribute to one on your own as long as you're earning enough income during the year to cover your contributions. You're able to choose your brokerage and investments, which can also make it more flexible and affordable than a 401(k). You can also decide whether you want a traditional, tax-deferred IRA or a Roth IRA, which allows for tax-free withdrawals in retirement.

The downside to IRAs is their low contribution limits. You can only contribute up to $6,000 to an IRA in 2021 or $7,000 if you're 50 or older. This limit applies to all your IRAs, not to each individually. So it may not be enough on its own to help you reach your retirement goals. It's still a good starting point, though.

ALSO READ: 3 Steps to Retiring a Millionaire With Zero Effort

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2. Use a self-employed retirement account, if possible

Self-employed individuals have access to a variety of special retirement accounts, like solo 401(k)s and SEP-IRAs, that traditionally employed workers can't use. These accounts enable you to contribute much more than regular IRAs or 401(k)s because you can make contributions as employee and employer.

Some accounts are only available to those who don't have employees, while others require employer contributions to employee accounts if you have other people working for you. Compare all your options before deciding which is best for you.

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3. Use a health savings account (HSA)

Health savings accounts (HSAs) aren't specifically designed for retirement, but they're a great place to keep your retirement funds anyway. Your contributions reduce your taxable income for the year, and if you use the money on medical expenses, it's tax-free. You can also make nonmedical withdrawals, though you'll pay taxes plus a 20% early withdrawal penalty if you're under 65.

You must have a high-deductible health insurance plan to contribute to an HSA. That's one with a deductible of $1,400 or more for an individual or $2,800 or more for a family. If you meet this criteria, you can open an HSA with most banks or brokers. Individuals are allowed to contribute up to $3,600 in 2021, and families may contribute up to $7,200.

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4. Use a taxable brokerage account

Taxable brokerage accounts are investment accounts that don't offer the same tax breaks as retirement accounts, but they also don't have as many limitations. You're free to invest in just about anything you want, and you can withdraw your money whenever you want, though you will pay taxes on your contributions and possibly your earnings.

If you want to save yourself a little money, make sure you hold your assets for at least a year before selling them. Then, your earnings become subject to long-term capital gains tax, rather than short-term capital gains tax. Depending on which tax bracket you fall into, you may not owe any taxes on your earnings at all.

ALSO READ: Forget Bitcoin. Become a Millionaire This Way

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5. Start saving as early as possible

Even if you can't spare that much money every month, you should start saving whatever you can right away. The longer your money has to sit in your account before you withdraw it, the greater your potential return, assuming you've made wise investments.

If your goal is to save $1 million for retirement, you'd only need to save $405 per month if you had 40 years until your retirement and your investments earned a 7% average annual rate of return. But if you only had 20 years to go, you'd need to save $1,971 per month to reach your goal. So starting early can definitely make saving enough for retirement a much easier task.

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6. Contribute as much as you can

It might not seem worth it to you to contribute $20 per month toward your retirement, but every little bit counts. And as discussed in the previous slide, the longer your money sits in your account, the more it could be worth by your retirement.

Set up automatic contributions so you don't have to think about them. Start with just as much cash as you can spare every month right now. Then try to increase your contributions by 1% of your income per year until you feel you're saving enough to cover your retirement costs. Remember to stay mindful of contribution limits on your retirement accounts.

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7. Try to reduce other expenses

Trimming your budget isn't always easy to do, but if you're able to, you can put more cash toward your retirement savings. Look at your spending habits from the past several months for areas you could cut back. Also go through your bank and credit card accounts from the past year to check for any unused subscriptions you may have forgotten about.

If you have credit card debt, try to pay it off using a balance transfer card or a personal loan. You may want to focus on paying off this debt first before you begin saving for retirement, because otherwise it could cost you more in a year than you're earning on your investments.

ALSO READ: 5 Supercharged Stocks That Can Make You a Millionaire

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8. Keep your investment fees low

All investments carry fees. You may not notice them because they're usually taken directly out of your account. These costs eat into your profits, especially if you already have a large portfolio. Check your prospectus and your broker's fee schedule to learn what you're paying. Ideally, you don't want to pay more than 1% of your assets in fees per year.

Index funds are a great investment that can help you keep costs low while earning a decent return. They're bundles of stocks you purchase together, so you instantly get a stake in hundreds of companies. This helps keep your portfolio diversified to reduce your risk of loss.

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9. Don't be too conservative with your investments

Just about everyone knows that exposing yourself to too much risk can lead to losses if your stocks don't generate the returns you'd hoped for. But it can also be risky to invest too conservatively. Your savings won't grow as quickly then, and you'll have to contribute more of your own money to reach your savings goal.

A good rule of thumb is to invest 110 minus your age in stocks. That means if you're 40, you should have 70% of your savings in stocks and 30% in bonds. As you age, you gradually shift more and more of your savings into bonds to help keep what you have.

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10. When all else fails, delay retirement

Delaying retirement isn't ideal, but it can help your retirement savings in three ways. First, it gives you additional time to work and save money for retirement. It also gives your investments more time to grow before you need to withdraw them. And it shortens your retirement, thereby reducing its cost.

You may not have to delay that long to see a noticeable difference in your savings. Even a few months may be enough to shore up a savings shortfall. But it can be a bit of a risky play because you can't be sure you'll be able to work as long as you like. Do your best to keep yourself healthy so an illness or injury doesn't force you to retire earlier than planned.

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Previous

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Good luck!

Saving enough for retirement without a 401(k) isn't an easy task, but if you leverage the tips discussed here, you can make it a little easier. Decide which tips work for you right now and start there. Then, look over your retirement plan at least once per year to decide if you need to make any changes.

If you get access to a 401(k) in the future, you can think about contributing to one then. But even if that doesn't happen, the accounts and strategies discussed here can still help you save $1 million or more.

The Motley Fool has a disclosure policy.

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