Saving for retirement through the obvious routes — mutual funds offered through your employer-provided retirement plan supplemented with an individual IRA and maybe a Roth — are all well and good. But those aren’t your only options. In fact, it pays to be as multi-pronged as you can when it comes to saving for retirement.
Depending on your age, resources, and tolerance for risk, there are options beyond the obvious ones to consider as additional avenues to nailing retirement. Here are four:
1. Take Advantage Of Self-Employed Retirement Plans
If you work for yourself, even on a part-time basis, or own your own business with or without employees, you might want to look into opening a Simplified Employee Pension Individual Retirement Account (SEP IRA) or a Savings Incentive Match Plan (SIMPLE). These tax-advantaged retirement plans pack quite a savings punch. For starters, both allow you to contribute pre-tax dollars, reducing your taxable income.
- SEPs’ benefits include minimal setup and management costs. They also offer flexibility — you can set one up regardless of the number of employees you have.
- Saving through a SEP allows you to turbocharge your retirement savings. That’s because these plans require a mandatory annual employer contribution of 25 percent of a participant’s annual compensation, up to a maximum amount of $61,000, whichever is less. Compare that with the annual contribution limits for traditional IRAs ($6,000), and for 401(k), 457(b), and 403(b) plans ($27,000 a year, for those age 50 and older).
For those of us at the stage where retirement is no longer a distant, abstract notion, these higher contribution limits can make a huge difference.
- SIMPLE plans are, surprise, inexpensive and straightforward to administer. If you’re eligible to set up and/or have access to a SIMPLE IRA, you can contribute up to $14,000 to it this year (the IRS makes an annual cost of living adjustment). If you’re over 50 years old, you can kick in an extra $3,000 a year in catch-up contributions for a total of $17,000 for this year.
- These plans come with a few catches. They are only allowed in companies with fewer than 100 employees. Companies with SIMPLE plans (and those with SEPs) also can’t offer any other retirement plan.
- Employers who offer SIMPLE IRAs must either match employee contributions dollar-for-dollar, at a minimum of 1 percent to a maximum of 3 percent, or make a fixed employer contribution of 2 percent of employee compensation.
- If you’re an employee with access to a SIMPLE account and are thinking of contributing to it but think you might need those funds before you reach retirement age, think long and hard before contributing. If you take an early distribution within the first 2 years of being enrolled, you’ll face a 25 percent tax penalty. Ouch!
Just as with IRAs, once you reach the age of 72, you must take required minimum distributions from both SEP and SIMPLE accounts.
Pro Tip: Employer contributions to SEPs and SIMPLES are considered tax-deductible business expenses.
2. Here’s To Your Health Savings Accounts (HSAs)!
HSAs are one of the most overlooked retirement savings strategies. They shouldn’t be. HSAs allow you to save and invest money on a pre-tax basis to use for medical expenses, as defined by the IRS.
They are also super flexible. Unlike the situation with FSAs, funds you place in an HSA are not subject to “use it or lose it” rules. They can continue to accumulate year after year. Then once you hit retirement, you can withdraw those funds free of taxes for qualified medical expenses. But that’s not all. You can use the funds for other expenses — you’ll just have to pay income taxes on them.
Another great feature is that funds you have in an HSA account aren’t subject to RMDs, so they can keep accumulating for as long as you want/need them to. Finally, as long as you’ve designated beneficiaries, any remaining funds in your account will eventually go to them. Pretty neat!
As with anything else, they do have a couple of key restrictions. HSAs are only authorized for use with high-deductible health insurance plans. You also can’t contribute to one once you reach 65, the traditional retirement age.
Some employers offer HSAs through their employee benefits programs. Otherwise, you can open an account with any provider you choose.
Pro Tip: The IRS sets caps on annual contributions to HSAs, but does not impose income limits. So save away!
3. Hedge Your Bets With Real Estate
Real estate has a lot going for it as a long-term investment. One, a rental property can provide income today and has the potential for you to make a profit when you eventually sell it.
Two, there are some nifty tax advantages. If you meet certain conditions, you can shield some of your profit from taxes when you sell your primary home ($250,000 for singles and $500,000 for couples). You can also deduct certain expenses related to real estate you own and use for business purposes. The 2017 Tax Cut and Jobs Act increased those benefits and added a new “qualified business income” deduction for certain types of business owners.
Lastly, real estate is both an inflation hedge — super important both in today’s high-inflation environment — and when you consider many of us will be in retirement for upwards of two decades, it also typically doesn’t move in tandem with stocks. That makes it a great complement to your other retirement-saving strategies.
Buying physical properties is one way to invest in real estate. But it’s not super efficient because buying and selling can take a long time and can be pretty costly. Then there are all the costs and hassles, and potential liability of owning and managing a rental property. And, especially in this market, not everyone can even get in the game.
An alternative is to invest in real estate funds. Real Estate Investment Trusts (REITs) own real estate and/or loans secured by real estate. They’ve generally held up pretty well when compared with stock and bond mutual funds and they can give you exposure to less accessible parts of the real estate market like commercial real estate (shopping centers, apartments, and office developments).
Pro Tip: If you are determined to buy physical property and you’re fairly knowledgeable about real estate, you could invest through a self-directed IRA. You are limited to investment property, you can’t buy or place your personal residence in one. And you must open your account through a custodian. There are also rules on renting, occupying, and handling maintenance and repairs. If you don’t follow these to the letter, you’ll be on the hook for huge tax penalties.
4. Consider The Alternatives
Alternative investments can run the gamut from private and residential and commercial real estate to commodities, both physical (e.g., oil, gold coins) or financial (funds), to hedge funds, private equity, and venture capital. The key thing to know is these investments are highly speculative.
On top of that, they tend to be highly illiquid. That means you can’t sell them quickly and when and if you do sell, getting in and out of them (read, buying and selling), will come with high costs. You certainly wouldn’t want to depend on alternative investments for a big chunk of your retirement cushion. And depending on your financial situation and your risk tolerance, they might not belong in your portfolio at all.
You can access some alternative investments by buying regular mutual funds, and some may even be available through your retirement plan. Outside of those options, you typically have to meet SEC requirements, namely be an accredited investor, to invest in the riskiest types of alternatives.
Why go through all the trouble? Alternative investments can be harder and more expensive to access, but they can benefit your retirement savings. Because they tend not to move in sync with other types of investments, they give you what’s known as “diversification benefits.”
It’s said there’s no such thing as a free lunch, but diversification is — if not free — a highly discounted lunch. Diversifying, or spreading your assets across different types of investments, can reduce your risk and improve your investment performance over time. If you do it right, meaning you own a mix of investments that are not highly correlated, you’ll be cushioned somewhat during market swings.
Whether any or all of these opportunities are viable for you, the key is knowing there is more than one route to a secure retirement. That can be helpful to keep in mind as you’re getting to the point where retirement is beckoning, or for some of us, looming. While some paths may be more or less appealing, consistently saving, diversifying your investments, and taking costs and taxes into account can go a long way to smoothing your path.
You also want to do some proactive planning — on your own or with the help of a financial advisor who is a fiduciary — on a regular basis. That way, you’ll be able to see how your savings are tracking with your anticipated income needs in retirement. (If you’re contemplating investing, you also want to get professional advice before jumping into anything.)
For more on financing your post-retirement life, take a look at these other articles: