5 Retirement Saving Strategies If You Don’t Have A 401(K)

Retirement Saving Strategies

More than 42 million Americans don’t have 401(k) or another similar retirement plan. According to federal data, 14% of small-sized businesses don’t offer retirement accounts. While it is difficult to beat the employer contributions (free money) in a 401(k), you can use these tips to build a retirement nest egg.

1. Create your own 401(k)

You should consider setting up a one-participant 401(k) or solo 401(k) through an online brokerage. Make sure your boss changes your status so that the income gets reported on a 1099 form instead of a W-2 tax form. This way you can be categorized as an independent contractor and set up your own 401(k).

Solo 401(k) has the same rules as an employer-sponsored 401(k). You will have contribution limits depending on your age. With that said, you are both an employer and an employee as a self-employed business owner. You can make contributions as per individual guidelines, which will eventually increase the overall limits.

Your spouse is the only other additional employee you can hire and cover through this arrangement.

2. Get solid investment advice

You need pros for financial advice even if you are among the most conscientious savers. There are a few things that only professional financial advisors can grasp. Financial planners can have a look at your income and savings and help you organize your finances. They will carefully review your existing financial affairs to let you know where you stand. Financial pros will also offer recommendations to help you get where you want to be.

Financial planners have the necessary experience and training to make educated projections about the future. This insight allows them to offer solid advice on investments, savings goals, life insurance, mortgages, taxes, and retirement and wills. The best financial planners will take your aspirations and financial goals into account. They won’t try to hold you back from spending your money. But, will ensure that you spend wisely.

3. Consider an IRA

Individual retirement accounts (IRAs) are a traditional yet flexible tax-advantaged instrument. There are several benefits to opening an IRA depending on your income bracket. Any money you stash will grow on a tax-deferred basis, which means you don’t need to pay taxes on your earnings until it’s time for withdrawal.

In addition, your tax rate and gross income get reduced by IRA contributions which is helpful even more during a recession. You may become eligible for certain deductions, including medical costs by having a smaller adjusted gross income. If you expect to be in a higher income tax bracket on retirement, you may want to consider opening a Roth IRA. It’s easy to open an IRA account if you use an automated investing service.

4. Get a health savings account

Health Savings Account or HSA can help you save enough for retirement if your existing health insurance plan has a high deductible. The money in your account can be accessed anytime to pay for copayments, deductibles, and other qualified medical expenses. Moreover, you cannot use it to pay for insurance premiums.

If you don’t use the money, you can always invest it. HSA balance can be carried to the next year and grows tax-free. You can have a nice golden nest egg if you combine your HSA with an IRA. HSA is one of the better retirement savings strategies since any contributions you make are tax deductible. You should ask your insurance provider or banker about opening an HSA.

5. Persuade your employer

If you don’t have a 401(k), you should try to speak to your employer. It never hurts in asking. Moreover, make sure you do your research first. There are several plans available depending on the size and type of business. You may want to zero down on a few plans that are a right fit for you and the business. Make sure you find plans that don’t require a lot of paperwork or time and effort.

You may also want to rally a few coworkers since there is always strength in numbers. Your employer may not readily agree to a plan. But, over a period of time they may come to realize that a retirement plan is important to their workforce. Don’t forget to harp on the employer benefits of contributing to a 401(k). There are tax incentives for employers that sponsor plans which is great during high inflationary times.

Even if you don’t get anywhere with wheedling your employer – it’s worth a shot. Don’t push the issue too hard though in the times of layoffs. You may have to wait until times are better.

8 Pragmatic Ways to Invest $10,000

Invest $10,000

If you go out seeking financial guidance, the one piece of advice you will receive from everyone without fail is going to be about the significance of investments. But, does the word ‘investment’ evoke pictures of men in suits, stock tickers, and million-dollar deals in your mind? Does it make you wonder how and where to begin investing when you do not have a lot of money to spare?

So here we go – here are some useful tips on how you can start investing in a practical manner with a reasonable amount, say, $10,000.

Reduce Your Debt

If you are carrying a high-interest consumer debt, one of the most pragmatic investments would be to use the $10,000 to pay off or reduce that debt. Consumer debt or credit card debt, carrying a high interest rate, is the scourge of sensible wealth creation. If you are making minimum payments on your credit card outstanding bills, you will end up paying a staggering amount of money in compounded interest.

Savings Account

You can open a high-yield savings account that will earn you a significantly higher rate of interest than a regular savings account. An online bank that does not require a minimum balance in a savings account, would be the pragmatic and safe choice. You can start generating interest on your entire balance without taking any undue risk with your investment. With that said, these banks have a provision for insuring your account with FDIC insurance up to $250,000.  

Certificate of Deposit (CD)

If you can commit your funds for a specific period of time, a Certificate of Deposit (CD) may be a more practical investment for your $10,000, with a higher yield in terms of the interest which is ideal when energy costs are increasing as they are now. You must be aware that any premature withdrawals might attract a penalty, and you will need to stay invested for the precise number of months you agreed to, while making the deposit. You can choose the tenure for a term CD, which could be a few months and up to five years.

Real Estate

Investments in real estate are popular with investors because of their immense potential for wealth gain which is fantastic during periods of inflation which is the case in 2021. Although it might seem that investing in real estate requires a great deal of money and may not be feasible with just $10,000 in your pocket, there are new and affordable ways like crowdfunding to invest in real estate. With crowdfunded real estate investments, you can generate a passive income without worrying about property maintenance, tenant management, or litigation issues. Experienced real estate investment teams handle all the nitty-gritty like screening potential borrowers, managing renters, and repairing or upgrading the properties.

401k Plans

With 401k plans, you enjoy tax benefits as you pay taxes only when you contribute, thus reducing your taxable income. This is a Godsend to hear for many because taxes may be increasing on Americans who are already dealing with higher gas prices and higher costs of goods. With that said, it’s one of the easiest options to begin investing in a small or moderate way, and if your employer offers to make a contribution to match your first investment, you can start with an adequate amount that they are willing to match. Most 401k plans offer stocks, index funds, and retirement plans. 

Index Funds

The prices for individual shares, especially the blue-chip ones, may seem too high for you when you are thinking of investing just $10,000. To begin with, and with a moderate sum to invest, one of the better ways to invest is with an index fund. The funds keep costs low as they work in tandem with the market benchmarks, thus avoiding any speculative practices. The minimum threshold to invest in some of these funds is quite low, making $10,000 an adequate amount of money to begin investing with. The low costs, simplicity, and diversified portfolios make index funds a safe and pragmatic investment choice.

Robo-Advisors

There are fully automated Robo-advisor platforms that take into account your investment goals and your risk appetite to select a mix of funds for investing your money. If you want to invest your money without putting in the effort and time needed to ensure a balanced investment portfolio, this might be the pragmatic choice for you. Most of these platforms charge an advisory fee of around 0.25 percent per annum, and you can open an account for very little, sometimes as low as $1. 

Business Bonds

You can begin investments from as little as $10 in some of the small business bonds, which also yield a return that is higher than investments in most other brands. The lure of a higher yield also entails higher risk, so you must be clear about the extent of exposure you are willing to accept in pursuit of your pragmatic investment goals. Look for business bond investment propositions backed by collateral to cut down on the risk factor.

Annuity vs. Mutual Fund: Which Makes More Sense For Retirees?

investment options

Two of the most prevalent investment options for retirees are mutual funds and annuities. Like all financial and investment products, investing in either of these options comes with a set of benefits and drawbacks.

Let us discuss in detail and try to find out which one of these two investment options makes sense for you if you are about to retire.

What is an Annuity?

In an annuity, you can invest an amount of money, as a lump-sum payment or in parts, as a part of a contract between you and your insurance company. In return, you can choose to receive guaranteed proceeds either for a fixed tenure or for as long as you live. Whether the payments start immediately or after a fixed period, depends on the terms and conditions of the annuity you invest in.

Based on the likely rate of return, annuities broadly fall into two types of categories, namely, fixed annuities and variable annuities.

Fixed Annuity

A fixed annuity, true to its name, provides an assured return for the tenure of the contract. The insurance company guarantees reimbursement in advance, regardless of the market performance.

Variable Annuity

The variable annuity payouts are neither fixed nor assured. They may increase or decrease based on the market performance.

A key advantage of annuities is that investors defer taxes on interest, dividend, or capital gains for the duration of time their money is in the annuity. The taxation, at withdrawal, is only on the capital gains and not on the amount contributed towards the annuity. Also, as their name suggests, the annuities can be annuitized. You can make a guaranteed income stream for a fixed period.

Annuities are basically insurance products and not investment securities and hence the insurance companies provide the guarantees to back them. However, you should keep in mind that the Securities and Exchange Commission (SEC) regulates only the variable annuities and not the fixed ones.

Annuities are a useful means to defer taxes on investments and generate assured regular income in retirement which is even more vital in a rising cost and energy environment because of new policies.

What Is a Mutual Fund?

In a mutual fund, investment companies collect money from investors and invest it on their behalf. The money goes into a mix of investment securities and money market instruments to maximize returns.

You can set up and use a 401(k) account, a brokerage account, or an individual retirement account (IRA) to invest in mutual funds. Investment specialists and money managers run mutual fund portfolios and are responsible to generate the maximum possible returns for their investors consistently.

There are several types of mutual funds, each based on its investment strategy and the nature of securities that it invests in:

  • Equity Funds invest entirely in stocks
  • Index Funds imitate the investment mix of a market index, and their performance is directly linked to that of the index
  • Exchange-Traded Funds trade on stock exchanges
  • Money Market Funds invest in debt instruments
  • Fixed Income Funds invest in bonds
  • Balanced Funds invest in both stocks and bonds
  • Sector Funds invest in a particular sector
  • Global Funds invest in overseas markets

Annuity or Mutual Fund: Factors to Consider Before Investing

Here is a comparison that may help you choose between the two types of investments:

Safety

If you do not foresee having a steady income post-retirement, a fixed annuity may be the best option for you. In a fixed annuity, the insurance company guarantees to pay you a particular amount until the end of your contract period. Variable annuities do not guarantee a specific amount, but some may have a minimum rate of return guaranteed by the insurance provider.

With mutual funds, there is no guaranteed income. The rate of returns on the money you invest varies a great deal depending on the market performance.

Expenses

Annuities have some of the highest associated expenses among the investment products.

Mutual funds, especially index funds, are very low on expenses.

Tax-Deferral

Tax on any income from annuities is deferred until the time of withdrawal. On withdrawal, only the capital gains are taxable.

In mutual funds, you are liable to pay taxes on dividends and capital gains. However, if you invest through an individual retirement account (IRA) or a 401(k) account, you are liable to pay tax only at the time of withdrawal.

Return on Investments

Mutual funds may offer variable returns based on market performance, while annuities offer assured returns. On the other hand, there are many charges and fees associated with the annuities, which, when deducted from your gains, tend to make the returns on investment much lower. 

Liquidity

With mutual funds there is no lock-in period, making it easier for you to sell and exit anytime you wish. 

With annuities, however, there can be a lock-in period, as long as 10 years sometimes. Any early withdrawal can attract high surrender charges which hurts even more in a slow growth or no growth economy.

The Bottom Line

If you are looking for absolute safety, annuities are the best option for you. But if you do not mind some added risk with the potential to earn higher returns, you should invest in mutual funds.