Apr 19 2010

No 401k, Maxed Out Roth IRA, What Else Do You Use to Save?

Posted by Simon Zhen in Banking, Retirement
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The rare dilemma of having too much money and where to put it next is a dilemma that we all wished we had. For those who are able to resist splurging on the newest gadgets and fashion with the intent of saving for the future, you may have exhausted all possible financial retirement vehicles – and desperately seeking more options to grow your nest egg.

Such avid savers do exist because reader Josh posed some questions regarding a similar situation.

Josh’s wife doesn’t have a 401k or any sort of employer-sponsored retirement plan. After maxing out her Roth IRA, what other ways are there to help her reach her retirement goals?

While there are a plethora of other options that one could invest and save money, none of them can really provide the tax benefits that make 401k’s and IRAs such popular retirement vehicles.

A taxable brokerage account. Despite not being a tax-advantaged account, a taxable brokerage account is a valuable alternative because they offer the widest variety of investments without income and contribution limits. For an aggressive approach, individual stocks are great for rounding out your portfolio allocation. Many advisors also suggest investments that would be bad for retirement accounts – such as tax-exempt funds and municipal bonds.
529 college savings plan or Coverdell ESA. Education costs are going up year after year. If you have children, the decision to start saving for their college education costs now would be wise. The 529 plan and Coverdell Education Savings Account are tax-advantaged since the contributed money grow tax-deferred and can be withdrawn tax-free for eligible educational expenses. These accounts won’t need $100,000s of dollars (hopefully) and will go towards your children, so they serve the purpose of reducing your financial burden in the future rather than actually helping you save for your own retirement.
Money market funds, high-yield savings accounts, and CDs. While these accounts don’t have the ability to match the higher potential gains of true investments, they are the safest methods of building a savings. These accounts are often havens for liquid cash but not the best choices for meeting your retirement goals. Currently, they don’t pay enough to compensate for inflation. Outside of establishing an emergency fund and having some solvent cash, money for retirement should have a better home.
Peer-to-peer lending. The social lending industry is growing at such a rapid pace that it could be the best new way to diversify one’s investment portfolio. For some people, stock selection may not be within their realm of expertise so investing in your peers may be a unique and intriguing alternative to buying shares of a company. Even though I’m a small and recent lender at LendingClub, I’ve found that peer-to-peer lending can be a great way of investing – I feel like a bank and I’m making (so far) an annualized return of 13.20%. Like all other investments, peer-to-peer lending doesn’t come without risks. People can default so it is best to diversify peer-to-peer loans.
*Pay down any form of debt. Sure, this isn’t considered an investment or a type of savings. But, debt is counterproductive towards your retirement goals. If there is extra cash that won’t earn more than the 29.99% APR on your credit cards or even the 5.5% APR on your mortgage, why not pay them down so you are not losing money? Becoming debt-free early on paves a smoother path toward retirement.

The fundamental rule is not to spend or lose it – courtesy of Warren Buffett’s great investing mind. Many people find themselves in this situation where they feel like they are constrained to the typical 401k and IRA. Branching out and diversifying is a sound investment mentality.

With or without tax benefits, all we want is to see the money grow.