Do You Really Need a 401(k) to Retire? People Over 50 Without One Weigh In

Most employers offer their employees a 401(k) plan, which is a retirement account that employees automatically contribute money to from their payroll. Their contributions aren't taxed until they withdraw their earnings, typically after retirement. Employees can contribute up to $19,500 to their 401(k) plan for 2021. If you are 50 or older, you can contribute an extra $6,500 this year in what's called a catch-up contribution.

One of the main differences and perks of a 401(k) compared to a traditional savings account is that many employers will match the money that you've contributed. According to Ubiquity Retirements and Savings, about 51 percent of employers offer 401(k) matching. Still, the U.S. Census Bureau found that only 32 percent of Americans are investing in a 401(k) plan, even though 59 percent of Americans have access to one. Many people believe that it's time to ditch the 401(k).

"The employer match is not guaranteed, as many people found out when companies reduced or suspended the match during the pandemic. And it turns out the match is not really 'free money' after all, because companies that offer matches simply make up for it by paying less in salary, according to the Center for Retirement Research," explains Pamela Yellen, financial expert, New York Times best-selling author, and founder of Bank On Yourself.

As tax rates continue to rise, Yellen says that people might be met with a big surprise when they withdraw their money. "As taxes rise, deferring them in a 401(k) or IRA means you'll pay more later—potentially a lot more. No one knows what tax rates will be in the future, no one saving in a tax-deferred 401(k), IRA, or investment account can know what their retirement account(s) will actually be worth when they want to tap into them," Yellen explains.

Ahead, more reasons why some people over 50 don't have a 401(k)—and maybe you won't, either.

They out-earn 401(k) benefits.

According to the IRS, any household that makes over $470,000 a year in 2021 is considered a top 1 percent income earner—and there aren't many significant advantages of a 401(k) for wealthy people. Since 401(k) contributions are capped each year, they can't contribute as much tax deductible money as they want. Ultimately, no matter how much they contribute, they won't be placed in a lower tax bracket.

Additionally, people can't touch that invested money without penalty until they're 59.5 years old. Instead, people will use that money to invest in other ventures, such as real estate, stocks, and other businesses, which might offer them a bigger return on their investment. On average, by the time a person retires, they'll have $232,379 in their retirement account. Rich people will have more than that by investing in other pursuits and saving on their own.

They invest elsewhere.

"As a 56-year-old entrepreneur who has worked in both the corporate world and the private sector, I can tell you that I personally was able to retire comfortably by building assets outside of a 401K or other retirement accounts," Anita Petty, the author of the upcoming book, Money Switch: Flipping Yourself Onto Happiness, Health and Wealth says. Aside from real estate, Petty invested in gold and silver bullion, purchasing a few ounces at regular intervals as a hedge against inflation. She also invested in stocks.

From 2005 to 2019, she moved her 401(k) account from an employer into a linked trust account that allowed her to trade equities and ETFs, not just mutual funds. "Most 401K plans greatly limit investor options and, thereby, their potential gains," Petty explains. "This one did not, as it offered much greater choice and flexibility. The account I used and still use today is the Charles Schwab PCRA Trust account."

However, if you have the opportunity to invest in a 401K that gives you lots of investment choices (which is rare), she says, then having a 401K may be a good option as part of a larger, diverse investment strategy.

They live where healthcare is free.

Julia Grey, 60, didn't start working until age 40, when she got divorced. She doesn't have a safety net or a 401(k) because she had assumed that she'd benefit from her now ex-husband's 401(k).

"I am a writer so I have been freelance for almost 20 years," Grey explains of her self-directed, late-bloomer career. So how is she managing it at age 60 without retirement savings? "I live in Israel, thank god," she says. "So there's great medical care."

They have a different retirement plan.

The first and easiest alternative to a 401(k) is a Traditional IRA. "If you have earned income and don't make too much, you can contribute $6,000 a year to an IRA. If you're over age 50, you can contribute another $1,000 a year. A traditional IRA contribution is made pre-tax and is deductible from your taxes. It can be invested in most types of asset classes, and you follow the same rules for tax deferral and distribution requirements as a 401k," Stephen J. Landersman, CFPR, financial planner and president of Unifi Advisors, explains.

Another retirement option is a Roth IRA. "There won't be any tax benefit on the contribution, but it'll be tax-free when you take it out, under the current rules," he says.

You can also use regular savings and investment accounts, Landersman adds. The upside is, there are no limits to your contributions. The downside: Your contributions won't be tax-deductible.

Becky Ruthman, a 64-year-old freelancer, has focused on alternative retirement plans such as IRA and SEP accounts, as well as rental properties. However, she lost a lot of money in stock market crashes when she invested with an IRA. Aside from her self-employed and rental incomes, Ruthman has access to early social security.

Those who are self-employed, like Ruthman, can use SEP IRAs, SIMPLE IRAs, and solo 401(k)s to help them save more for retirement and put away more than they can in a traditional or Roth IRA.

They have a brokerage account or HSA.

Besides IRAs, you can also save into a taxable brokerage account. "Though you won't receive tax deductions or tax-advantaged growth, selecting tax-efficient investments can help you minimize tax consequences," Tiffany Lam-Balfour, investing and retirement specialist at NerdWallet, says. Also, if you happen to need liquidity prior to age 59.5, you can dip into your taxable brokerage account without triggering the 10 percent early withdrawal penalty associated with retirement accounts.

Another way to save for retirement is by taking advantage of a health savings account or HSA. "HSAs receive triple tax benefits with deductible contributions, tax-deferred growth and tax-free withdrawals when used on qualified medical expenses," Lam-Balfour says. Since healthcare can be a significant cost in retirement, beefing up your HSA can be beneficial for retirement.

They invest in life insurance.

Cash-value life insurance is another way many people accumulate retirement funds that are tax-deferred and take distributions tax-free. "Most people buy the most insurance for the smallest premium," Landersman explains. "These premiums, that are thousands or even tens of thousands of dollars each year, grow tax-deferred—like a 401k. In many of these policies, the premiums can be invested in stocks and bond-based accounts."

Yellen also advises that people put their money into high-cash-value, low-commission dividend-paying whole life insurance. "Your cash value can easily and immediately be tapped for any purpose at all, and your policy can continue growing as though you never touched a dime of it," she explains.

Like any retirement plan, there could be costly disadvantages to life insurance plans depending on your income and age. Not all retirement options are suitable for everyone. Consult with a financial advisor or retirement expert before making a big decision about your future.