Retirement Alternatives to a 401(k)
Throughout history, humanity has experimented with many different kinds of retirement plans. The earliest retirement plan was the “no-one-lived-past-their-30s” plan. While this had the advantage of not actually requiring any planning, it did not leave much time for relaxation.
Later, if legend is to be believed, putting the elderly out to sea on an ice floe gained some popularity. However, with arctic currently melting, this retirement plan is less viable than ever.
Since 1978 the 401(k) account has become a common solution for building retirement funds. 401(k) plans are investment accounts offered by employers as part of their benefits package. Employees can direct a small percentage of their pre-tax income into these accounts and their employer will match a portion of those funds.
But many jobs do not offer a 401(k). Perhaps your job does not. If that’s the case, how can you avoid being put out on the proverbial ice floe when you reach retirement age?
When you want something done right…
There are tax-advantaged retirement accounts you can open on your own that are separate from an employer-provided plan . You will not receive the benefits of that employer matching your contributions (unless you are remarkably persuasive), but it is likely better than nothing.
“Individual retirement accounts give anyone the option to save for retirement outside of an employer plan,” offers Sam, who writes about early retirement with her husband at How to FIRE. “You could open one at a brokerage firm like Fidelity or Vanguard. However, the IRS does have income requirements and contribution/distribution limits that you should be familiar with. Roth IRAs grow tax-free and traditional IRAs grow tax-deferred. If you are married and one of you does not work outside the home, you may even have the option for a spousal contribution.”
If you want your retirement investments to be more tangible, you could consider putting money into property. Unfortunately, this will require you to have quite a bit of money already saved up. There are a few upsides if you can manage it, however.
“Rental properties complement stocks and more traditional retirement accounts extremely well,” says Brian Davis, co-founder of SparkRental.com. “To begin with, they generate ongoing passive income … Rental returns adjust for inflation automatically, as well. Not only do rents rise alongside inflation, they are a primary driver of inflation, and often rise faster than the broader inflation rate.”
While the money you put into the property will likely be subject to taxes, property ownership has its own sets of carve outs.
“They offer tax benefits, with every conceivable expense deducted from your profits,” Davis explains. “Even some paper expenses like depreciation are deductible. Taxpayers do not have to itemize their deductions to take advantage of these deductions, either – they come off your rental income before it is added to your adjusted gross income.”
Getting into the franchise game
Have you ever fancied yourself a business owner, but you just are not able to do it full time? Well you may be able to get into the franchise game as an investor.
“Most investors are unaware that you are able to invest in a full-time or semi-absentee franchise tax free and penalty free with the Rollover for Business Startups (ROBS) program,” says Kenny Rose, founder and CEO of Semfia. “A semi-absentee franchise investment can be owned while working full time and can both build equity and produce a significant income. These are an out-of-the-ordinary investment that can also be paired with with a [U.S. Small Business Administration] loan to leverage pre-tax funds.”
Rose says the best way to approach this type of investment is to selectively pick your marketplace and do your research to vet different brands. “Although most people hear the word ‘franchise’ and go straight to food, the best way to reduce market risk is to look into recession-resistant industries like haircare, automotive, and fitness,” he says.
One caveat to be aware of is the time commitment. Even though it may not require your full time attention, investing in a franchise is not a completely hands off endeavor.
“Unlike other typical 401(k) investments, franchises are not passive money earners,” Rose warns. “Even for a semi-absentee investment you will need to manage a manager for 5 to 15 hours per week. Newer trends for semi-absentee are for nonworking spouses and recent college graduates to handle overseeing the management with the franchise structure.”
One other risk of note about small business loans: Know that your personal credit may impact your ability to get a small business loan, and a small business loan can impact your credit report, as well. Always make sure you understand the ins-and-outs of taking out any type of personal loan or business loan before moving forward with a money-borrowing decision.
If all else fails…
You may not have access to a 401(k) through your job. You may not meet the requirements for individual tax-free accounts. You may not have the money to invest in property or a franchise. But you can still do your best to put away money for retirement.
“Saving for retirement can be intimidating when you know that there are penalties for distributing the money before you are eligible,” Sam says. “If you would like more flexibility with your money, consider opening a taxable account. You can still earmark the money for retirement, but also use it without penalty before your golden years. Just be mindful that you won’t have the same tax advantages that retirement accounts offer. Any option to get you saving is better than not saving at all.”
It is not easy to think about retirement while you are dealing with so many daily expenses. But if you can make it a habit to regularly put aside retirement money, it should make a big difference later on.
G. Brian Davis is a landlord, personal finance writer, and co-founder of SparkRental.com, which provides free video courses and rental investing tools for landlords. He spends most of the year overseas, splitting his time between Abu Dhabi, Europe, and his hometown of Baltimore.
Kenny Rose is the founder & CEO of Semfia, a franchise brokerage to provide education and guidance on investing locally through semi-absentee franchise ownership. Rose founded Semfia after working in finance at Merrill Lynch and also spending time in the franchise industry. He realized that people want to hold a franchise business as an investment and not a full-time job, but they can’t get past that pesky F-word. A graduate of San Diego State University’s Top 10 Financial Services program, he has appeared on ABC, in the Amazon Best Seller “More Than Just French Fries,” and has been a featured speaker for the U.S. Small Business Administration, Small Business Development Centers of America, and SCORE. Follow him @InvestLocally.