Beyond The 401(K): Exploring Alternative Retirement Plans

Summary: Enjoying your retirement to the fullest involves meticulous retirement planning. This means you might want to look beyond 401(k)s for alternative investment strategies.

Your retirement should be a period to relax and enjoy the fruits of your labor. You may want a lifestyle that allows you to travel the world, indulge in your favorite hobbies, or bask in the peace of your golden years.

For many seniors, having a 401(k) is the foundation for retirement. In fact, about 34.6% of working-age Americans have 401(k)-style accounts. However, as far as an alternative retirement plan goes, simply relying on your 401(k) is not enough for you to enjoy a post-work lifestyle that caters to your needs.

Thankfully, there are alternative retirement plans and investment strategies beyond the conventional 401(k) that could complement or even surpass the 401(k) in securing a comfortable retirement.

In this article, we’ll outline some of these alternative retirement options and explain why they might be worth exploring.

Why your employer-sponsored 401(k) may not be enough

Before we get into alternative retirement plans, let’s understand why relying solely on your employer-sponsored 401(k) might not suffice for your retirement planning.

The 401(k) is undoubtedly a valuable tool for retirement savings. It allows you to contribute a portion of your pre-tax salary to a retirement account. Usually, employers match a percentage of your contributions, boosting your savings.

However, the limitations of a 401(k) become evident when you consider factors like contribution limits, investment options and potential market risks. The contribution limits on a 401(k) may restrict your ability to save enough, especially if you start planning for retirement later in life.

Usually, funds can’t be withdrawn until you reach a certain age. Early withdrawals can result in penalties and taxes, limiting your access to funds when unexpected financial needs arise.

Moreover, the investment options within a typical 401(k) plan are often limited to a selection of mutual funds, bonds and company stocks which might not be in sync with your preferred investment strategy.

Market volatility is another concern. Traditional 401(k) plans are tied to the stock market, making them susceptible to economic downturns.

Depending on a 401(k)-based retirement option alone exposes your retirement savings to market risks, and a potentially significant loss of value right when you need it the most.

Exploring alternative investment strategies

Considering the potential shortcomings of relying exclusively on a 401(k), it might be prudent to explore alternative retirement plans and investment strategies.

These investment alternatives can offer diversity, potentially higher returns and greater control over your retirement savings. Let’s take a closer look at some of these options.

1. Real estate investments

One avenue to diversify your retirement portfolio is through real estate investments. Real estate has proven to be a stable, appreciating asset over the long term. Think of exploring options such as rental properties, real estate investment trusts (REITs) or real estate crowdfunding platforms.

Rental properties can provide a steady income stream through monthly rent payments, while REITs allow you to invest in a diversified real estate portfolio without the hassle of property management. Keep in mind, REIT investments can be affected by interest rate moves, economic cycles, tax and regulatory requirements as well as leverage risks, liquidity risk and market risk.

Real estate crowdfunding platforms enable you to invest in specific real estate projects with smaller capital amounts, providing an accessible entry point into this asset class.

2. Stock market investments beyond traditional 401(k) options

While your 401(k) may offer a limited selection of stocks, you can expand your stock market investments beyond these constraints.

Consider individual stocks, exchange-traded funds (ETFs) and even options trading. Individual stocks allow you to handpick companies you can bet on, while ETFs provide a way to diversify across various sectors with lower risk.

Options trading, while more complex, can offer additional flexibility in managing risk and generating income. However, you need to educate yourself thoroughly or consult a financial professional before venturing into options trading. There are a variety of factors which may influence the price of an option and options are not suitable for all investors.

3. Precious metals and commodities

Diversifying into precious metals, such as gold and silver, can act as a hedge against inflation and economic downturns.

Precious metals tend to retain value in the long term, making them a valuable addition to your retirement portfolio and a key element of your retirement planning. You can invest in physical metals or explore exchange-traded funds (ETFs) and mining stocks related to precious metals. Investments in precious metals are not suitable to everyone and may involve loss of your entire investment.  These investments are subject to sudden price fluctuation, possible insolvency of the trading exchange and potential losses of more than your original investment when using leverage.

Commodities, including energy, agriculture and metals, can also provide diversification. Investing in commodity-focused ETFs or commodity futures offers exposure to these markets without the need for direct ownership.

4. Start your own business or invest in private businesses

Another way to build an alternative retirement is to invest in private businesses or even start your own business.

This approach gives you greater control over your earnings with the potential for higher returns. You can consider investing in startups, small businesses, or even consider franchising.

Starting your own business can be a fulfilling venture in retirement as it allows you to leverage your skills and experience. There’s a caveat, though: carefully assess the risks and challenges associated with entrepreneurship and do your due diligence before taking the plunge.

Alternative retirement plans for a secure retirement

The following retirement plans also offer unique benefits and considerations.

Individual Retirement Accounts (IRAs)

Individual Retirement Accounts (IRAs) are versatile retirement savings tools that come in various forms, including Traditional IRAs, Roth IRAs and SEP IRAs.

Unlike 401(k)s, IRAs offer a broader range of investment options, allowing you to diversify your portfolio based on your risk tolerance and financial goals.

Additionally, contributions to traditional IRAs may be tax deductible, providing immediate tax advantages, while Roth IRAs offer tax-free withdrawals in retirement.

Roth IRAs

A Roth IRA is a tax-advantaged retirement account that allows you to contribute after-tax income. Generally, it also permits qualified withdrawals that are tax-free.

Unlike traditional IRAs or 401(k) plans, Roth IRAs offer more flexibility in terms of withdrawals. You can access your contributions at any time without penalties, which gives you a safety net in emergencies.

Additionally, Roth IRAs do not have required minimum distributions (RMDs). This means your earnings can grow tax-free for as long as you wish.

SEP IRA

A Simplified Employee Pension Individual Retirement Account (SEP IRA) is designed for self-employed individuals and small business owners.

This retirement account allows for higher contribution limits than traditional IRAs, making it an attractive option for those with variable income.

Contributions made to SEP IRA are tax-deductible, and the account grows tax-deferred until withdrawals in retirement. SEP IRAs offer a straightforward and flexible way for entrepreneurs to build a substantial retirement nest egg.

Health Savings Accounts (HSAs)

Health Savings Accounts (HSAs) are not just for medical expenses; they can also serve as a valuable retirement savings tool. Contributions to HSAs are tax-deductible, and qualified withdrawals for medical expenses are tax-free.

However, if you don’t use all the funds for medical costs, the remaining balance can be withdrawn penalty-free for non-medical expenses after the age of 65. Withdrawals made for other purposes will be subject to ordinary income taxes.

This dual-purpose nature makes HSAs an intriguing option for those looking to combine healthcare planning with retirement savings.

Company-sponsored retirement plans

Some companies offer retirement plans beyond the traditional 401(k). These may include pension plans, employee stock ownership plans (ESOPs) or profit-sharing plans.

Exploring these options, if available, can provide additional avenues for retirement savings. Pension plans, for example, offer a fixed income stream during retirement, while ESOPs allow employees to become partial owners of the company.

Match your contributions with employer plans

If your employer offers a matching contribution to your 401(k) or other retirement plan, take full advantage of this benefit. Employer matches are essentially free money, providing an instant return on your investment.

Even as you explore alternative strategies, maximizing your contributions to employer-sponsored plans can enhance your overall retirement savings.

Design a secure retirement plan for yourself

Beyond the traditional 401(k), there is a diverse range of alternative investment strategies available to enhance your retirement plans.

While exploring these alternative investment strategies, endeavor to strike a balance between risk and reward because each investment avenue comes with its own set of risks. Therefore, it’s important to understand your risk tolerance and invest accordingly.

Further, consider consulting with a financial advisor to craft an investment strategy that aligns with your specific retirement goals. You can trust Mutual of Omaha to help you on this journey. Our financial professionals can help you build a retirement plan that works for you and helps give you the peace of mind you deserve.

FAQs on alternative retirement plans

Q1: Can I combine traditional and alternative investments in my retirement portfolio?

A: Yes, combining traditional and alternative investments can provide a balanced approach to risk and return.

Q2: What are the tax implications of alternative investments?

A: The tax implications vary based on the type of alternative investment. Consult with a tax advisor to understand the specific tax considerations associated with your chosen alternative investments.

Q3: Are alternative investments riskier than traditional options?

A: While alternative investments can carry higher risks, they also offer the potential for higher returns. It’s essential to diversify your portfolio and carefully assess the risk-reward ratio of each investment.  All investing involves risk, including the possible loss of principal and there can be no assurance that any investment strategy will be successful.

Disclosures:

Registered Representatives offer securities through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Investment Advisor Representatives offer advisory services through Mutual of Omaha Investor Services, Inc.

Mutual of Omaha and its representatives do not provide tax and/or legal advice, and the information provided herein is general in nature and should not be considered tax and/or legal advice.

Not all Mutual of Omaha agents are registered representatives or financial advisors.