By Megan Sayles
AFRO Staff Writer
msayles@afro.com

For many Americans, especially those shut out of traditional retirement systems, thinking beyond an employee-sponsored retirement plan or pension may be a financial necessity. 

Though alternative options, like real estate or small business ownership, can support long-term retirement savings building, they can pose risks. This week, the AFRO spoke with Katherine Lucas McKay, associate director at the Aspen Institute Financial Security Program, to discuss the non-traditional strategies that exist and their reliability.

AFRO: What are some alternative retirement savings strategies and how do they work— or not work— for people of different socioeconomic and racial backgrounds?

Katherine Lucas McKay: It is important to start by recognizing that the dominant retirement strategies—like investing in markets through tax-advantaged accounts such as a 401(k), 403(b), Individual Retirement Account (IRA)  or a pension— have the strongest proven track record compared to alternatives, like investing in real estate, owning a business that you sell upon retirement or investing outside of retirement accounts. But, even these proven strategies do not serve everyone well. 

The National Retirement Risk Index from Boston College finds that 39 percent of non-retired people in 2022, were at risk of not maintaining their standard of living in retirement. There are two key reasons: millions of workers do not have access to retirement savings plans at work where it can be easiest to sign up and, even for those who do have retirement accounts, it is difficult to save the amount of money needed for a secure retirement. 

That drives many people to consider alternative strategies, especially if they lack access to a pension or workplace retirement account. Those people tend to be workers who are Black, Latino or immigrants, and people who are not in the workforce, such as those who are full-time caretakers for a family member.  Alternative strategies can be risky to rely on for retirement security. With real estate, it’s almost always an all-or-nothing investment. People must save up until they can make large down payments on each property and take out debt to finance the purchase. This delays asset purchases, leaves less time for assets to appreciate and concentrates risk in a single sector of the economy. Property is also expensive to own and maintain. 

For business ownership, the risk is that when you need to retire there may not be a buyer. Also, very few small businesses are worth hundreds of thousands of dollars, which is what people need to retire without a reduction in their quality of life. Only 14.6 percent of households have business equity, and the median amount is $90,000. Millions more people run successful small businesses, but they don’t generate enough profit to motivate someone else to buy their business. 

Finally, when people invest outside of retirement accounts, they lose out on tax benefits that save them thousands or tens of thousands of dollars over their working years. For those reasons, alternative strategies are harder to make pay off compared to dominant strategies. They can work, but they are less dependable. 

AFRO: What role can homeownership, real estate or small business ownership play in retirement planning—even if those endeavors aren’t a primary strategy?

KLM: I discussed some of the risk of relying on real estate and small business ownership as primary retirement savings strategies, but they can and often do have a place alongside traditional retirement accounts. Some small landlords, for example, plan to have a few rental properties during retirement that can provide additional income. Many small business owners also invest some of their profits in retirement accounts. They may also sell their businesses, but that does not provide all the funds they will need. 

What is most common is for homeowners to pay off as much of their mortgage as possible before retiring so they can sell their home and move to a less expensive place that they buy with cash. They use the additional funds from selling the larger, more expensive home to supplement their retirement savings. 

AFRO: What trends are you seeing for how younger generations, like Millennials and Gen Z, are approaching retirement planning? 

KLM: Millennials and Gen Z workers are starting to save for retirement earlier in life. They open retirement accounts at higher rates in their 20s than Gen X did, for example. The oldest Gen Zs are 29, so this generation is the young people in the workforce. As of 2022, 49.6 percent of households under age 35, owned retirement accounts. Back in the late 90s, that number was closer to 40 percent. 

They also have more saved in these accounts than young workers of previous generations. However, they’re not just investing in the traditional, dominant retirement strategies. Almost one in four households under 35 directly own stocks outside of retirement accounts. A 2022 study of who owns cryptocurrencies found that 20 percent of people aged 26 to 40 owned crypto, a much higher rate than people over 40. 

AFRO: How might you be able to merge a traditional strategy with an alternative one for long-term retirement savings? 

KLM: People who are interested in alternative strategies should consider how to pursue those alongside a traditional strategy. That way, they can benefit from long-term increases in various investment markets and compound interest but also put money into strategies that they are more personally interested in or feel that they are likely to succeed in.