No 401(k)? 2 Ways to Retire a Millionaire Anyway

A recent study from financial company T. Rowe Price concludes that more than 40% of private-sector workers don’t have access to a workplace retirement plan. If you’re in that group, you may get frustrated when you see retirement advice that involves maximizing your 401(k).

You may not have employer-match contributions or high contribution limits to help build your nest egg, but that doesn’t mean you can’t retire the way you want to. It does mean you need a different, possibly more aggressive approach. Read on to learn about two plans that can help you retire with $1 million or more without the benefit of a 401(k).

The math of retiring a millionaire

You can amass $1 million by investing about $900 monthly for 30 years. There are two big assumptions here. The first is that the money is invested with a growth rate that averages 7% annually. This is a reasonable goal, since 7% is in line with the long-term average growth of the stock market after inflation.

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The second assumption is that you’re not paying taxes on your earnings every year, because taxes cut into your returns and wealth. If your combined federal and state tax rate is 25%, for example, that will trim your 7% earnings down to 5.25%.

The 401(k) does offer tax-deferred earnings, along with high contribution limits. That combination is effective for long-term wealth production. Since you don’t have a 401(k) currently, you’ll want to mimic that dynamic with other accounts.

1. IRA, plus a taxable account

IRAs, like 401(k)s, defer the taxes on your earnings—as long as those earnings don’t surpass the IRA income limits. The drawback is that the contribution limits are low. In 2022, you can save up to $6,000 in a traditional or Roth IRA if you’re 49 or younger. If you’re 50 or older, your annual contribution limit is $7,000.

If you’re trying to save $900 monthly for retirement, you’d hit your IRA contribution cap halfway through the year.

To make up for the IRA’s lower contribution limits, you can supplement your IRA investing with a taxable brokerage account. Here are the highlights for how you’d use these two accounts together as a 401(k) substitute:

IRA: Max out your allowed IRA contributions. Use this account to hold any assets that would normally raise your tax bill — such as dividend payers, fixed-income funds, or stocks you may sell profitably in the short or medium term.
Taxable brokerage account: Use your brokerage account to invest amounts above the IRA contribution limit — however much is necessary to reach your retirement goal. Invest in non-dividend-paying stocks that you’re holding for the long term. If you’re not earning dividends or selling to generate capital gains in this account, you’ll keep your tax bill low.

2. Side hustle plus a SEP IRA

A second option is to save for your retirement in a SEP IRA, which also defers taxes on earnings and has very high contribution limits. The downside is that you must have self-employment income to be eligible for SEP IRA contributions.

A SEP IRA allows you to contribute up to 20% of your net self-employment earnings to your own retirement plan. Net self-employment earnings is the net profit of your business less your deduction for self-employment tax. You can learn more about this calculation on the IRS Deduction Worksheet for the Self-Employed.

If your net self-employment earnings can support it, you can contribute up to $61,000 annually to your own SEP IRA. That’s more than enough to make your millionaire retiree dreams come true.

If you’re on the 30-year savings timeline, you should be eligible for $900 in monthly SEP IRA contributions with net self-employment earnings of $54,000. Admittedly, it’s no small venture to spin up a business that generates $50,000 or $60,000 in profits in your spare time. But it can be done.

The self-employment route could be the right move if your budget today doesn’t allow for high-dollar retirement contributions. You’d essentially create a new stream of income and use part of it to fund your retirement.

Note that the SEP IRA has rules about contributing equally to your own account and your employees. That’s a point to consider if your business idea involves bringing on employees down the road.

The wealth formula is the same

You can retire a millionaire without a 401(k). The truth is, the bare-bones formula is the same, whether you put your money in a 401(k) or elsewhere. To build wealth, you must save and invest consistently for decades.

Tax deferrals can expedite this process, but they don’t replace the basics of long-term saving and investing. Focus on those two activities, and you’ll see your nest egg grow.

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