5 Retirement Planning Tips for the Self-Employed
You don’t really want to think about retirement when you are in your thirties, but in today’s worlds that is exactly when you should start. This is especially important for self-employed individuals who don’t have access to company-funded 401(k)s. We understand that as a young entrepreneur thinking about stepping away from your business is definitely something you don’t make a priority, but it also shouldn’t be something you put on the back burner. So here are some great retirement-planning tips that can help you sort this part out sooner rather than later.
Diversify your portfolio
As they say, don’t put all your eggs into one basket. It is best to have several different investment strategies and a whole range of assets. That way if there are any major shifts in the market your pension fund will be safeguarded. If you start in your thirties you can allow yourself several riskier investments with bigger payout. But if your retirement age is approaching, it is best to stick to safe and stable bonds and lower-risk stock investments.
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Did you know that a majority of small business owners don’t have a retirement savings plan. Now if you want a luxury retirement option, you better start one now. Yes it is hard being self-employed, and more often than not people tend to re invest the little extra money they earned right back into their business, and avoid putting it into a retirement fund. This is a big mistake. Set a realistic monthly amount that you can take out each month and put it towards your retirement. Make it a must, just like paying bills or taxes is. So that way you won’t have an excuse to skip a few payments, and by the time you retire there will be a hefty sum waiting for you.
Open A Solo 401(k) or SEP IRA
It is important to keep in mind that just because you’re self-employed doesn’t mean necessarily you shouldn’t use tax-advantaged retirement investments. There are still options available. You can allow your wealth to grow and compound tax-free. For example, you could open a Solo 401(k) and not pay taxes on it until retirement. Another option is a Simplified Employee Pension Individual Retirement Arrangement (SEP IRA) which is a type of IRA for business owners that has tax advantages coupled with higher contribution limits than other IRAs. So as you can see there are some great alternatives.
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Consider a defined benefit (DB) plan
One of the advantages of self-employed individuals over the ones who own businesses that have employees is that they don’t need to worry about discrimination rules. DB is calculated based on the benefit you’ll receive at retirement, your age and expected investment returns. If you’re doing well, and raking in considerable sums you should consider a defined benefit plan which will allow you to put away as much as $250,000 a year, which is a great tax advantage.
Opt for SIMPLE IRAs
If you choose this option, so the SIMPLE IRA, it lets you save as much as $12,500 if you’re younger than 50, with an extra $3,000 catch-up contribution bringing that number to $15,500 in total if you’re 50 or older. The good news is that in addition to the employee-based contributions, you can also opt to match your regular contributions, dollar for dollar, up to 3% of your salary as an employer contribution. So it is definitely worth considering.
These are some great options you should take into consideration as a self-employed entrepreneur. But as you have seen it all takes time, so the sooner you start thinking and investing towards your retirement the more relaxed you are going to be when you finally get there.