How to Retire a Millionaire Without a 401(k)

It's possible—especially if you start early

When it comes to saving for retirement, it's hard to beat a 401(k) plan. The high contribution limits and employer match can really boost your savings. And if you have a retirement savings goal—like $1 million—that 401(k) can get you there much faster.

Still, one-third of U.S. private workers don't have access to work-based plans and, even then, many employers don't offer a match. But there's good news: It's possible to retire a millionaire even if you don't have a 401(k) plan.

Key Takeaways

  • If you don't have a 401(k), start saving as early as possible in other tax-advantaged accounts.
  • Good alternatives to a 401(k) are traditional and Roth IRAs and health savings accounts (HSAs).
  • A non-retirement investment account can offer higher earnings, but your risk may be higher, too. 

Individual Retirement Accounts (IRAs)

An individual retirement account (IRA) is a tax-advantaged account that holds investments that you choose. There are two main types of IRAs—traditional and Roth—and the biggest difference between the two is when you pay your taxes.

Traditional IRAs

With traditional IRAs, you get an upfront tax break. You can deduct your contributions when you file your annual tax return. The money in the account grows tax-free. But when you take money out during retirement, it's taxed as ordinary income.

Roth IRAs

A Roth IRA doesn't provide an upfront tax break. But qualified withdrawals—those made after age 59½ from accounts that have been established for at least five years—are tax-free. This can be a huge advantage, especially if you expect to be in a higher tax bracket during retirement.

IRA Contribution Limits

Whether you have a traditional or Roth IRA, the annual contribution limits are the same. For the tax years 2021 and 2022, you can contribute up to $6,000, or $7,000 if you're age 50 or older—a "catch-up" contribution for employees approaching retirement age.

Can You Save $1 Million in an IRA?

So, is it possible to save $1 million in an IRA? While the answer depends on the investments you choose for the account, it's certainly doable—especially if you start early and save consistently.

For example, if you contribute $6,000 to your IRA each year starting at age 25, you'd have about $1.2 million saved by age 65, assuming a 7% annual rate of return on your investment. However, if you wait until age 35 to start saving, you'd have less than half that amount—$567,000—by the time you hit age 65. This shows you just how important it is to start early.


How Can Investors Pay their Future-Selves?

Health Savings Accounts (HSAs)

If you're not sure you can save $1 million in an IRA alone, a Health Savings Account (HSA) can be an undercover way to boost your retirement savings. While HSAs are intended to pay for healthcare expenses, they can be a valuable source of income once you retire.

To qualify for an HSA in 2021 and 2022, individuals need a health insurance plan with a deductible of at least $1,400. For families, it's $2,800.

Your HSA contributions are tax-deductible, so they lower your tax bill the year you make them. And withdrawals are tax-free if you use the money to pay for healthcare expenses, including dental and vision care.

HSA Contribution Limits

For the tax year 2021, the maximum HSA contribution amounts are:

  • $3,600 for individuals
  • $7,200 for family coverage
  • $1,000 extra "catch-up" contribution if you're age 55 or older

In 2022, the maximums rise to $3,650 for individuals and $7,300 for families.

Unlike flexible savings accounts (FSAs), HSAs don't have a use-it-or-lose-it provision. If you have any money in the account at the end of the year, it stays in the account indefinitely. That means if you make the maximum contribution each year, you could end up with a tidy sum in retirement, assuming you stay healthy.

How Much Can You Save in an HSA?

Assume you contributed the full $3,600 in 2021 and have $500 in medical expenses each year. After 30 years, you’d have over $220,000 to add to the retirement pile, assuming a 5% rate of return.

If you have family coverage, you can contribute $7,200 each year. If you max out your contribution for 30 years, have $1,000 in medical expenses each year, and have the same 5% rate of return, your account would grow to nearly $450,000 after 30 years.  

HSA Withdrawals in Retirement

You can always withdraw money from your HSA tax-free and penalty-free for qualified medical expenses.

In retirement, you can withdraw HSA money for things other than healthcare without incurring a tax penalty. Once you turn age 65, you can use HSA funds for any reason. You just pay ordinary income tax on the distributions.

Taxable Investment Accounts

If you max out an IRA and an HSA, a taxable investment account (aka, a non-retirement account or brokerage account) is another option to consider.

These accounts don’t offer any tax advantages such as deductible contributions or tax-free growth. But you have a shot at earning better returns than you would by parking your extra cash in a regular savings account.

Of course, investments with higher potential returns also have higher risks, so you have to think about your risk profile and time horizon when deciding how much risk to take.

You can invest as little or as much as you like in a taxable account and put your money into stocks, bonds, mutual funds, exchange-traded funds (ETFs), and real estate investment trusts (REITs), among other options.

Just remember that earnings from these investments are subject to capital gains taxes. Be sure to plan ahead for how that could affect your spending power in retirement.

The Bottom Line

A 401(k) can be an extremely powerful tool to fuel your retirement savings efforts, but not having one doesn't mean you have to retire broke.

You can take advantage of other savings and investment plans to enjoy the kind of retirement you want. Start saving as soon as possible to improve your chance of hitting that $1 million goal for retirement. And be sure you understand the rules for how much you can save and how your contributions will be taxed, so you're not hit with any surprises during your golden years. 

Article Sources

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