Entrepreneurs have some commendable personality traits: they are proactive, they strategize, they think big and most important of them all is that they plan for long-term benefits. Planning comes naturally to all entrepreneurs and yet retirement planning for self employed and entrepreneurs is often a big challenge. The biggest challenge most self-employed professionals face is investing their time and money in scaling up their business and simultaneously achieving personal goals for financial independence.
About 10% of the American workforce is self-employed and the number seems to be increasing with each passing year. A recent survey conducted by Manta found that 34% of entrepreneurs do not have a retirement plan. It’s a massive loss of opportunity for this 34% because there are profitable retirements plans in the market that are specially designed for entrepreneurs and self-employed professionals, which are better than the regular 401 (k) plans. You surely don’t want to be in that 34%, do you? So, here are the 4 Cs of retirement planning you can take advantage of to gain financial health when you retire.
1. CHOOSE the Right Retirement Plan.
While you nurture your entrepreneurial skills, you can simultaneously prepare for a secure retirement. Fortunately for you, there are quite a few retirement plans. The differences between these plans may be small but they have the potential to make a big impact on your business and your needs. Take some time to compare the pros and cons while you identify the right plan for you considering your retirement and tax situations.
Here are the retirement accounts specially designed keeping you in mind:
a. Simplified Employee Pension (SEP) IRA
If you are a sole proprietor, this type of IRA is beneficial for you. You can invest up to 25% of your net income. The cap is $55,000 for this year. You are exempted from paying tax when you are saving, and this plan also offers fund flexibility. You can fund your account after you have filed your taxes. This flexibility is beneficial because if your income is higher than you projected, you can then make a bigger contribution, thus reducing your tax bill. If you have a few employees, they cannot contribute to SEP IRA, however, they can contribute to their personal 401(k).
b. Traditional or Roth IRA
This plan is best if you have just started out on your entrepreneurship journey and you may not have enough money to keep aside for retirement. This plan limits your contribution limit up to $5,500. If you are 50 years and above, you can make an additional contribution of $1,000. Regular tax deductions are applicable when you are saving, but withdrawals in retirement are tax-free. This is an individual plan, so if you have employees, they have to set up and contribute to their own IRAs. Do some research or go through various retirement planning tips for entrepreneurs to ensure that you are doing it right.
c. Savings Incentive Match Plan for Employees (SIMPLE) IRA
If you have plans to expand your business, SIMPLE IRA is ideal for you. This plan allows you to invest even after you have hired an employee. However, you would have to match employees’ contribution of up to 3% of their income. You can make an annual contribution of $12,500 a year. If you are over 50 years, you can contribute up to $15,500. However, you cannot withdraw any amount within 2 years of opening the account, if you do, there will be a penalty applied.
d. Individual – Solo 401(k)
If you are one among the fortunate few who have a lot of money at your disposal which you are happy to contribute towards building your retirement fund, this plan is for you. Your spouse can be a part of this plan. You are your own employee here, so you can contribute up to $55,000 to your individual 401(k), or $61,000 if you’re over 50 years. This plan is not applicable to your employees.
2. CALCULATE the Amount You Need to Save
When you are running your business, it may be difficult to save a lot of money for your retirement because most of your capital is used to invest in your business. To be on a safer side, it is always better to calculate the amount you need to set aside. There are many retirement calculators available online; you can take help from them for getting a better idea of how much you need to save for retiring the way you want.
3. CONTRIBUTE More as You Grow
As your business grows, you start to earn more. It is therefore advisable to save more. Increase your retirement contribution amount over time for successful retirement. The bigger retirement fund you manage to accumulate, the better position you’ll be in a position to have a worry-free retirement. If it helps, set up automatic deductions so that you don’t miss out on setting funds aside.
4. CONSIDER Your Lifestyle Choices
Planning for retirement is not just about saving for a peaceful retirement. It’s more than that. It’s about living a life which you are not accustomed to. Most entrepreneurs lead an active life. When their life comes to a still all of a sudden, they might not take retirement nicely. It may affect their emotional and mental health. The retirement fund can help them start this phase of their life by turning on a new leaf altogether. You can invest the fund to take up a new hobby, learn a new skill, or travel the world. By doing the activities you love, you regain your lost motivation.
Statistics say that retirement lasts for more than 30 years on average. A common rule of thumb is that for you to retire comfortably, you would need to have up to 80% of your current annual income. Therefore, however, tempting it may be to put off your retirement planning for a later date, it is not advisable. The good news is regardless of the income you generate, you can still explore the retirement plans from the options given above. These plans are easy to administer and relatively low cost. So, plan well to retire well!
Retirement Planning for Self Employed is as Easy as 1.2.3…4
As you can see, retirement planning does not have to be complicated. If you are self employed or an entrepreneur, it is just a matter of keeping up with the 4Cs.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last 10 years has turned his focus to self-directed accounts and alternative investments. Rick regularly posts helpful tips and articles on his blog at SD Retirement as well as Business.com, SAP, MoneyForLunch, Biggerpocket, SocialMediaToday and NuWireInvestor. If you need help and guidance with traditional or alternative investments.