Saving for retirement is one of the biggest financial challenges you'll face. There are various schools of thought on how much money you'll need to live comfortably during retirement. No matter what that figure is, it's essential to be proactive about saving if you want to reach your retirement goals.

While many people save for retirement in employer-sponsored plans like 401(k)s and 403(b)s, they're not always an option. But here's good news: There are lots of other ways to build up that nest egg. Here's how you can reach your retirement savings goals, even if you don't have a 401(k).

Key Takeaways

  • Many people have 401(k)s at work, but there are other ways to save for retirement if you don't have access to one.
  • Individual retirement accounts (IRAs) are easy to set up and manage, and they offer valuable tax advantages.
  • You can also save (and grow) your money in a brokerage account, annuity, real estate, and a small business.

Individual Retirement Accounts (IRAs)

IRAs are tax-advantaged accounts that hold investments you choose. There are two main types of IRAs: traditional and Roth. The biggest difference between the two is when you pay your taxes.

With traditional IRAs, you get to deduct your contributions the year you make them. Then, when you start taking out money during retirement, those withdrawals are taxed as ordinary income.

Roth IRAs work the opposite. You don't get a tax break when you add money to the account. But qualified withdrawals—those made after age 59½ and when it's been at least five years since you first contributed to a Roth—are tax-free. And you can withdraw your contributions at any time, for any reason, with no taxes or penalties.

The biggest drawback to saving in a traditional or Roth IRA is the low contribution limit. And if you make too much money, you can't contribute at all to a Roth.

For 2019 and 2020, you can stash up to $6,000, or $7,000 if you're age 50 or older. Still, if you max out your IRA every year, you could end up with a tidy sum by the time you reach retirement. Of course, the sooner you start, the better.

Brokerage Accounts

If you have a funded brokerage account (aka, a non-retirement account), you can invest in a variety of instruments including stocks, bonds, mutual funds, exchange-traded funds (ETFs), real estate investment trusts (REITS), certificates of deposit (CDs), and money market funds.

Of course, higher-risk investments like individual stocks have the potential to earn more than low-risk investments like CDs—but you could lose money. Bonds, CDs, and money market funds are more conservative, but they provide stability that's beneficial in the long run. The trick is to find a balance that you're comfortable with, and that will help you reach your savings goals.

Be sure to pay attention to fees. Even tiny differences in fees can have a huge impact on your nest egg over time.

There's no standard formula for deciding how much of your money to put in high-risk, high-reward investments. In general, however, most people taper off the risk as they get closer to retirement, when they have fewer years to recover from large losses. Still, people are living longer today, so just because you're in your 60s doesn't mean you need to sell your stocks.

Tax-Deferred Annuities

Annuities offer another way to reach your retirement savings goal. Offered through insurance companies, annuities provide tax deferral coupled with varied investment opportunities. Annuities are available with any of the following:

  • A fixed interest rate
  • An indexed interest rate, based on the performance of a specific index
  • A variable rate, tied to market performance

The money you stash in an annuity grows tax-deferred but becomes taxable once you withdraw money in retirement. In addition to tax deferral, annuities can provide a guaranteed income stream for a certain number of years or for a lifetime.

Annuities aren't appropriate for every investor. They're only backed by the claims-paying ability of the issuing insurance company, and there's no guaranteed investment performance. Also, annuities tend to be expensive—meaning, you might end up paying a lot in fees.

It pays to be cautious if you're considering an annuity. “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," says James B. Twining, CFP®, founder and CEO of Financial Plan, Inc., in Bellingham, Wash.

"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.”

Real Estate Investments

Another way to save for retirement is an investment in real estate. If you have an IRA or brokerage account, you may already have access to the real estate sector through 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 of Index Fund Advisors in Irvine, Calif.

“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 REITs, you can buy real estate outright to generate an income stream during your retirement years. If you invest in a multi-family home, for instance, you can live in one section and rent out the other. This effectively reduces your total living expenses while paying down the mortgage.

Later, you can decide to continue to rent out the property and receive a steady income from rents. Alternatively, you can sell the (ideally appreciated) home and use the proceeds for living expenses or other investments.

Invest in a Small Business

Another option to help you reach your retirement goals is to invest in a small business. A small business investment doesn't necessarily mean becoming a business owner. If you don't want to drive the ship, you can invest in an established company as a silent partner.

Whether you choose entrepreneurship or investing, small business profits are not capped and the potential return on investment is higher than other alternatives. Of course, these investments carry with them a great deal of risk. There's no guarantee that the time or money you invest in a small business will generate a substantial return over time. Choose wisely.

The Bottom Line

When a 401(k) is not an option, you still have a number of ways to invest for your post-work years. It's always a good idea to work with a trusted financial advisor, especially if you opt for any higher-risk investments.

And, no matter where you put your money, be sure to rebalance your portfolio regularly as your goals, risk profile and time horizon change.