Different Ways to Save for Retirement

Saving for retirement is often one of the largest financial objectives individuals face. While there are various schools of thought on the total amount necessary to live comfortably during retirement, the majority of advisers, planners and analysts agree that being proactive in setting money aside is key to reaching a retirement goal.

This is often done through employer-sponsored plans, such as a 401(k) or 403(b), an individual retirement account, such as a traditional or Roth IRA, or a combination of the two. When these retirement vehicles are not readily available or do not have appeal, individuals saving for retirement utilize brokerage accounts, annuities, real estate and small business ownership to achieve their goals.

Conventional retirement savings vehicles such as 401(k)s and IRAs are popular because of the unique benefits they offer to savers: tax deferral and investment options. While a brokerage account alternative to these popular plans does not offer tax deferral, it does offer savers an opportunity to invest.

Brokerage accounts offer a wide range of investment selections, including individual stocks and bonds, mutual funds, exchange-traded funds (ETFs), real estate investment trusts (REITs), certificates of deposit (CDs) and money market funds. More aggressive investment options, such as stocks, mutual funds and ETFs, have the potential to earn more than a traditional savings or checking account. Bonds, CDs and money market funds are more conservative, but they provide stability to a portfolio that is beneficial in the long run. Brokerage accounts are available through online platforms, at some banks and credit unions, or through a financial adviser or a licensed broker.

“The other benefit of a brokerage account is that the long-term capital gains tax rate of 20% is lower than ordinary income tax rates for most investors,” says Michael Zhuang, principal of MZ Capital Management in Bethesda, Maryland.

Annuities offer another path to achieve a retirement savings goal. They provide tax deferral coupled with varied investment opportunities. Annuities are offered to individuals or couples through insurance companies. They are available with a fixed interest rate, an indexed interest rate (based on the performance of a specific index) or a variable rate (tied to market performance).

Funds deposited into an annuity grow tax-deferred, but they are taxable once funds are distributed during retirement years. In addition to tax deferral, annuities can provide a guaranteed income stream to the account holder for a certain number of years or for a lifetime. Annuities are not appropriate for every investor, and annuities are only backed by the claims-paying ability of the issuing insurance company. Investment performance within this type of vehicle is not guaranteed.

It pays to be cautious in considering these investment vehicles. “Annuities are contracts with life insurance companies, and there is a long history of manipulative insurance agents selling annuities for the large commissions they earn, rather than for the benefit of the investor. These commission-based annuities are typically more expensive than other collective equity securities such as mutual funds and ETFs. It is not unusual to find annuities with total annual costs in excess of 4% per year – a tremendous headwind that results in poor performance net of expenses,” says James B. Twining, CFP®, founder and CEO of Financial Plan, Inc., in Bellingham, Washington.

Another common option among individuals saving for retirement is an investment in real estate. Most investors who save in a 401(k) or IRA have access to the real estate sector through holdings in a mutual fund or an ETF.

“The best option for investors is to buy into a fund that itself invests in real estate investment trusts (REITs) around the world,” says Mark Hebner, founder and president of Index Fund Advisors, Inc. in Irvine, California. “REITs are extremely cost-effective, transparent and liquid. Gaining access to REITs through a mutual fund allows investors to gain global diversification in real estate in a cost-effective way.”

Outside of these vehicles, individuals have the option of purchasing real estate outright for the purpose of generating an income stream during retirement years. A couple that purchases a multi-family home, for instance, can live in one section while renting out another, effectively reducing their total living expenses month to month while expediting paying down on the mortgage balance. When properly managed, this strategy results in additional funds that can be set aside for retirement goals in addition to an appreciating asset that can be sold for a lump sum or rented out during retirement. However, real estate transactions and upkeep are expensive, and there is risk involved in finding and keeping quality tenants over a long period of time.

Investment in a small business is also an option for individuals not using a 401(k) or an IRA to fund retirement goals. A small business investment does not necessarily mean becoming a business owner; it can come instead in the form of investing in an already established company as a silent partner.

Whether an individual chooses entrepreneurship or investing, small business profits are not capped and the potential return on investment is thus higher than other alternatives. However, these investments carry with them a great deal of risk. There is no guarantee that the time or money invested in a small business will generate a substantial return over time for the business owner or the investors.

When traditional retirement accounts are unavailable, consumers still have a number of ways to invest for their post-work years. It's always a good idea to work with a trusted financial adviser when opting for investments that carry more risk.