If I told you “You should invest for retirement,” your first reaction might be, “You mean in the stock market?” And you’d be right—that’s exactly what I would mean.
That’s because equities (stocks) are the most prevalent and discussed way that Americans try to grow their nest eggs. It’s arguably the most effective, too.
However, it’s not the only way to save toward your retirement—not by a long shot. Indeed, if you really wanted to, you could retire without ever investing a dime in the stock market. Like with equities, you’ll face some level of uncertainty and risk in any alternative form of saving or investing you choose, including the possibility that you might not be able to grow your funds fast enough. But it is doable.
If for whatever reason you’re determined to retire without investing in the stock market, or you want to at least minimize how much your savings are reliant on equities, you have several options at your disposal. Let’s discuss some ways you can prepare for a financially secure retirement, sans stocks.
Why Do Some People Dislike the Stock Market?
Why might someone try to pull off a stock-free investment plan?
Well, the stock market’s relative volatility is a turn-off, for one. Compared to bonds or savings products like certificates of deposit (CDs) and money market accounts, the returns of a major stock-market index will typically be quite choppy—and individual stocks can be much jumpier!
Stocks also commonly move in ways that seem counter to what some people might expect. Plus, major stock moves can be driven not just by news or financial fundamentals, but emotion. So for some people, the stock market feels too unpredictable and arbitrary … and they’re not entirely wrong! If anyone knew what was going to happen in stocks every day, that person would be rich beyond belief.
But the stock market is more orderly than you might realize, and many seemingly puzzling stock moves often have less apparent (but still valid) drivers behind them.
Benefits of Investing in the Stock Market
Before we dive into alternatives to investing in stocks, I’d like to quickly refer readers to the wise words of Dr. Ian Malcolm, printed above.
While you can build a retirement plan that doesn’t involve the stock market, few financial professionals would actually recommend it.
Why? Well, the evidence just isn’t in favor. We find one great example in The Age of Disorder, a long-term asset return study by Deutsche Bank (and highlighted by Ben Carlson at A Wealth of Common Sense). Its data only goes through mid-2020, but it’s one of the most comprehensive studies of returns out there, boasting both a very long-term horizon (up to 200 years’ worth of returns for some assets) and a wide array of different asset classes.
The Age of Disorder slices and dices this data over numerous time periods, but let’s just look at real average annual returns (returns adjusted for inflation) from various assets over the trailing 50-year period through mid-2020:
- Equities: 6.47%
- Corporate Bonds: 5.32%
- Gold: 4.28%
- 30-Year Treasury: 4.09%
- 10-Year Treasury: 3.39%
- Oil: 1.19%
- Housing Prices (price only): 1.09%
- Broad commodities: -1.67%
Indeed, it’s difficult to find many long-term time periods where stocks aren’t near or at the top.
Given that saving for retirement is effectively a race to amass a large amount of money in a limited amount of time, one could argue that you should own assets that have historically grown faster than others … and that most experts expect will continue to produce this outperformance over the long term.
If you still disagree, let’s talk about some other ways to grow your wealth.
Ways to Pay for Retirement Without the Stock Market
Below, I’m going to detail several strategies that can help you build your retirement savings and establish new retirement income streams.
And you don’t need to settle on just one—you can combine pretty much all of these.
At the end of the day, what’s most important is that you put these strategies to work as part of a comprehensive retirement plan. It’s not enough to just hit the ground running and hope for the best.
1. Invest in Bonds
Bonds are issued by companies, governments, and other entities to raise funds. So when you buy a bond, you’re effectively lending money to the issuer. In return, you expect to receive the face value of the loan back by the time the bond matures, and to compensate you, you’ll also receive periodic interest payments (typically twice per year).
There are numerous types of bonds, each with varying levels of risk and reward. Among them?
- Sovereign bonds: Issued by a country. In the U.S., these are referred to as Treasury bonds, and they’re backed by the full faith and credit of the American federal government. These are considered extremely safe bonds, but because of that high quality, you won’t get as much interest as you would from other bonds of similar maturities. (Also, Treasuries are exempt from state and local taxes.)
- Corporate bonds: Issued by a company. In the U.S., ratings companies evaluate bonds and grade them based on their quality, which is effectively their perceived ability to return your full investment. Some are considered to be “investment-grade,” while others are “below investment-grade” (aka “junk”). Typically, the lower the quality, the higher the interest payments need to be to entice buyers. Thus, junk bonds tend to pay more than investment-grade bonds. (These ratings extend to all types of bonds, including the sovereigns I mentioned above.)
- Municipal bonds: “Munis” are issued by states, cities, and other municipalities. They’re typically considered high-quality but not as safe as Treasuries. Muni bonds are special in that they’re exempt from federal income tax … and depending on where you live and which bonds you hold, state and even local taxes, too.
Very generally speaking, bonds tend to be more stable than stocks, but also have less return potential. They’re often used in concert with stocks to manage risk, but if you’re trying to go without equities altogether, this is one of the best places to look for some level of return over time.
Related: How Is Retirement Income Taxed?
2. Invest in Alternatives
“Alternative investments” is a catch-all term for most investments that aren’t stocks or bonds. Real estate, cryptocurrency, precious metals, and private equity are all examples of well-traveled, high-profile alternatives.
However, alternatives can get really … well, alternative. You can also invest in assets such as fine wine or whiskey and even famous artwork.
Whether you can access these assets, and what that access looks like, largely boils down to your means. Low-net-worth investors can sometimes invest in these alternatives through specialized websites and other apps. High-net-worth investors can use these apps too (and often have more options within them), but they can sometimes access these investments on their own—say, buying whiskey directly from a distillery, or buying art from an individual collector.
Alternatives’ potential for return can be quite high—at times, on par with or even exceeding stocks. Just understand that many alternative investments are very illiquid, which is another way of saying that your money could be locked into them for years—selling them can be extremely difficult.
These markets can also be even jumpier than stocks, and there’s far less available information about most of these investments than there are about publicly traded assets such as stocks and bonds.
Related: Do These 10 Home Renovations Before You Retire
3. Purchase Fixed Annuities
Annuities can provide a guaranteed passive income, often backed by an insurance company, which can be very useful during retirement. You pay for an annuity upfront, then receive payments in return for a specified length of time or for life.
Although the payouts sometimes come from money invested in the stock market, the insurance company holds the investment risk, meaning you get your fixed amount no matter how the stock market is performing.
Qualified annuities are funded with “pre-tax” dollars (taxes haven’t been paid yet), while non-qualified annuities are funded with “after-tax” dollars (taxes have already been paid). Both types of annuities offer tax-deferred growth, so you don’t have to pay income taxes on earnings until you start receiving payments.
A downside of annuities is that they can have high administrative fees, leading to a drag on your returns. Depending on the annuity, you might also be stuck receiving an amount that doesn’t keep up with inflation.
Worried about a premature death? If you still have an active annuity contract when you die, the fixed annuity generally passes to your chosen beneficiary.
Related: 5 Costly 401(k) Rollover Mistakes You Must Avoid
4. Be a Landlord
Whether you’re saving for retirement or trying to add another income stream in retirement, being a landlord could certainly fit the bill.
To be clear: Becoming a landlord isn’t necessarily easy, but it is a path to a relatively secure and potentially lucrative source of income.
Your first mental image might be of owning an apartment building or some other multifamily real estate. It’s certainly doable, though there are high financial barriers to entry and you have to be committed to it as a full-time job.
However, you can also simply buy a single unit, like a house—indeed, doing so may allow you to claim a depreciation deduction on your federal tax return. If you own a particularly large house, you could consider renting out a basement or another area of your home (though doing so sometimes requires separating your and your tenants’ living spaces). And you could even downsize into a smaller home but rent out your old home.
Houses aren’t the only rental option, either. Do you have an empty barn or (Midwest warning!) pole building somebody could pay you to use as storage? How about extra land where somebody could plant a garden? Renting out an available space can provide you with a predictable income stream.
Related: Should Retirees Move? 10 Considerations
5. Invest in Real Estate
You don’t have to be a landlord to earn income from real estate. You can simply invest in buildings—and if you go this route, you’ll have far more options than just residential properties.
A blunt truth: The richer you are, the easier it is to invest in real estate, and the more methods you’ll have at your disposal. Many real estate syndications (which pool investor money to buy real estate) require participants to be accredited investors.
However, the past few years have brought about real estate investing apps that cater to the well- and not-so-well-heeled alike. Fundrise, for one, allows non-accredited investors to participate in real estate funds, each of which holds a number of properties.
- Regardless of your net worth, you can now benefit from real estate’s unique potential for generating consistent cash flow and long-term gains with Fundrise starting as low as $10.
- Enjoy set-it-and-forget-it managed portfolios with standard Fundrise accounts, or actively select the funds you want to invest in with Fundrise Pro.
- Diversify your portfolio with real estate, private tech investing, or private credit.
- Low minimum investment ($10)
- Accredited and non-accredited investors welcome
- IRA accounts available
- Highly illiquid investment
Related: 10 Frugal Habits That Make Retirees’ Lives Better
6. Maximize Your Social Security Benefits
Social Security isn’t meant to fully cover your retirement costs. According to the Social Security Administration (SSA), assuming you retire at your full retirement age, how much of your average earnings Social Security retirement benefits replace can range from as much as 78% for very low earners to around 28% for maximum earners.
Still, there are things you can do to increase your Social Security benefits.
Two main factors affect how much Social Security you’ll receive. The first is how much money you’ve earned. The SSA calculates the average earnings of your 35 highest-earning years of employment. If you work fewer years, those show up as zeroes, which can substantially bring down your average. If you’ve worked for, say, 33 years, it might be worth it to delay your retirement an extra two years.
The other major factor in your Social Security benefit is when you take Social Security. The three tiers to consider when deciding what age to start collecting your benefit are as follows:
- Age 62. This is the minimum age a person can start collecting “Old-Age” Social Security. Collecting at this age means your benefit is reduced.
- Full retirement age. Your full retirement age depends on the year you were born. For anyone born in 1960 or later, the full retirement age is 67.
- Past full retirement age. If you delay receiving your benefit until past your full retirement age, your benefit increases incrementally the longer you wait. The benefit increases max out at age 70, so there is no initiative to delay past that age.
So, if you want to maximize your Social Security benefit, make sure you have those 35 years of qualified employment, and consider holding off on retirement until age 70.
Similarly, timing has an impact on how much a person can collect for Social Security spousal benefits. Just understand that if you have a pension, the Government Pension Offset may affect your spousal benefit.
Related: 10 Common Social Security Mistakes You Should Know
7. Get a Job That Offers a Pension
Your standard 401(k) is a defined contribution plan, in which you contribute to a plan, and how you invest within that plan will determine how much money you’ll get out of it when it’s time to withdraw.
A pension, on the other hand, is a designed benefit plan that promises you’ll receive a certain monthly benefit once you retire. While a pension plan will be invested in the stock market and other assets, people who receive pension payments generally don’t need to worry about market fluctuations because the employer is the one holding the investment risk. If the employer’s investments don’t grow enough to cover your payment, they have the responsibility to make up the difference.
This option has a few drawbacks, too.
For one, if you’re only a year or two away from retirement, you likely can’t travel this route. Pensions usually are not instantly vested—how long it takes to become fully vested will depend on the job, but it could be anywhere from five to 10 years.
Even if you’re younger, traditional pension plans are far less common today than they were in the past. Bureau of Labor Statistics data shows that only 15% of private industry workers had access to defined benefit plans as of March 2023.
Still, while they aren’t widely popular anymore, there are still some jobs that offer pensions, so you might want to snag one if you can.
Related: How to Invest Money: 5 Steps to Start Investing w/Little Money
