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Key Takeaways
- People who don’t have a defined contribution plan, like a 401(k), are more likely to run out of money in retirement than those who do.
- More than two-thirds of workers have access to retirement plans, but only a little over half participate.
- If you don’t have a workplace retirement plan, you may consider investing in a traditional or Roth IRA, brokerage account, or an HSA.
If you’re not participating in a defined contribution (DC) plan, such as a 401(k), you may be at a greater risk of running out of money in retirement than someone who does, a new study found.
Research from Morningstar shows 57% of people not participating in a DC plan were at risk of running out of money versus 21% of those who expect to participate in a DC plan for 20 years or more.
Common DC Plan Mistakes To Avoid
“Plan participation matters because Americans who participate in a DC plan are much more likely to save for retirement than workers who do not participate,” the Morningstar researchers wrote.
And as simple as it often is to participate in a DC plan, not everyone does.
Although the majority of workers have access to a workplace retirement plan, a little more than half are actually participating in them. As of March 2023, 73% of workers had access to a workplace retirement plan, but only 56% participated.
The benefits of having a 401(k) may also be erased if you regularly tap your money early and have to pay an early withdrawal penalty and taxes.
“The 401(k) doesn’t work if you treat it like a bank. It’s meant to be there for your retirement,” says Barbara Ginty, a CFP and host of the Future Rich podcast.
Saving For Retirement When You Don’t Have a 401(k)
If you don’t have access to a 401(k) plan through your employer, there are other options to consider.
For those who work at a company that doesn’t offer a 401(k), Ginty suggests that workers ask their employers about the possibility of implementing one. David Rosenstrock, a CFP and founder of Wharton Wealth Planning, recommends considering a SEP IRA or a solo 401(k) if you’re self-employed,
If those options don’t apply, you may consider opening a traditional individual retirement account (IRA) or Roth IRA.
“If you don’t have anything available through work and you are responsible for it on your own, I recommend that you mimic the benefits and features of what you see in a workplace plan, which is [that] you automate your savings and do it on a regular basis,” says Ginty.
Traditional IRAs and Roth IRAs work a little differently. Roth IRAs are after-tax accounts and are subject to income restrictions. In contrast, traditional IRAs don’t have income limits and are pre-tax accounts that may provide tax deductions.
Since IRAs have much lower contribution limits than 401(k)s, Ginty and Rosenstrock encourage people to supplement their savings by investing in a brokerage account. Although they don’t offer special tax benefits, brokerage accounts don’t have contribution limits or early withdrawal penalties.
In some cases, a health savings account (HSA) can also be used for investing for retirement, according to Rosenstrock. HSAs offer a triple tax advantage—contributions are deductible from taxable income, investments grow tax-free and funds can be used to pay for qualified medical expenses without paying taxes, though some restrictions may apply.
Using an HSA for retirement savings may not be for everyone said Ginty, especially for those who anticipate using their HSAs for regular doctor’s visits, medications, and more.
