Self-Employed? Don’t Neglect THIS.

by Miranda Marquit · 14 comments

For the self-employed, it can be tempting to forget some of the basics associated with long-term financial planning.

When you’re trying to get your business off the ground, you’re more interested in the day-to-day of survival. You do, however, still need to remember to prepare for the future with retirement planning.

After all, even as a self-employed business owner, chances are you’ll want to retire at some point — or at least cut back on your heavy involvement with the business.

Here are three retirement-saving tips for the self-employed:

Get Started Now

The #1 rule of retirement planning (or any investing, for that matter) is to get started now. Even if you don’t feel like you have “enough” money to get started, you should begin investing in a retirement account.

Anyone can open an IRA with a relatively low initial investment with an online brokerage, and it’s possible to contribute as little as $50 or $100 per month. While it doesn’t seem like much, developing that habit can pay off over time — not to mention you’re taking advantage of compound interest to maximize your money (no matter how little you have right now).

#1 rule of saving

Look at Alternative Plans

We’re so used to thinking of retirement plans as being attached to work done for “the man.” However, the company 401(k) isn’t the only retirement option out there.

Not only is there a Solo 401(k) designed for the self-employed, but there are also other retirement plans for business owners — like the SEP IRA, which can provide you with even more favorable terms and the ability to contribute a great deal of money each year.

As your business grows, look into retirement plan options that allow you to set more money aside as a business owner. You’ll end up with higher contributions, and have the ability to build your nest egg much faster. Don’t assume that just because you don’t work for someone else, there is nothing available to you.

Plan for Erosion

The reality of any investing is that your real returns are going to be eroded. You need to pay investing fees and retirement plan fees, as well as taxes. Inflation will also play its part in reducing your spending power as time moves forward. It’s important to plan for these realities and do what you can to minimize their impact on your future wealth.

Compare investing fees with various plan options and accounts. Also, consider your current and future situation to determine what types of accounts can help you minimize your tax liability. And, while you can’t get rid of inflation, it is possible for you to overcome it with the right investing strategy and a properly allocated portfolio.

It might seem like an unnecessary distraction, but the reality is that even the self-employed need to start their retirement planning now. Make it a point to evaluate your long-term retirement needs and create an action plan — and don’t forget to adjust your plan and contributions as your business finds success.

If you’re self-employed, how are you saving for retirement?

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{ read the comments below or add one }

  • In the Swedish tax system can you make big deposits on the company’s profit before tax for retirement savings for the business owner, even if you have a small home business, and you also have your day job still.

  • fredjohnson says:

    Been self employed for 30 yrs. Started a SEP IRA at first. Then went to a SIMPLE because we hired employees and a 401k is too expensive to administer. This way I can administer the SIMPLE myself. Even did a traditional IRA for awhile. Wife and I now have $800k in retirement accounts. Have another $3.4 million in non-retirement accounts which was accumulated in the past few years because the business got more profitable. No debt. The money I saved for retirement early on gave me the confidence to take more risks at work and those risks proved fruitful.

    • David Ning says:

      Good for you Fred! Having accumulated over $4 million in liquid assets is an outstanding achievement! This goes to show people that with hard work, being self employed can definitely pay off.

      And speaking of 401ks, there are now pretty inexpensive third party administrators who can help small businesses handle the paperwork. You should look into them since it may give you more tax advantage space and help your employees out too!

  • Gary Kerr says:

    So it’s very important to manage your money carefully. Running out of cash before you get paid again could mean living on credit cards, which charge high interest rates.

    • David Ning says:

      Thanks for pointing out why so many low income people get in financial trouble. Once you start borrowing, then so much of your cash flow will go to interest payments it’s hard to stay afloat.

      Stay debt free people!

  • Average Investor says:

    Started early is the best advice. Young people have the biggest advantage of TIME on their hands 🙂

  • I in mid 20s, from Canada. Currently, I am not self-employed, but planning to start a small business in future. Also, I already started my retirement plan and try to max our my RRSP, so I can retire early (around 40s).

    Thank you for sharing,

    Cheers.

    • David Ning says:

      Retiring in your 40s is plenty early, so congratulations in advance. Remember to keep investment costs low and with the power of tax deferral in Canada’s version of retirement accounts, I’m sure you’ll realize your dream on schedule!

  • David Ning says:

    I started out with a SEP-IRA because it was easy to setup and have moved onto a Solo 401k. It’s true that the best time to start saving is now (or rather, yesterday). One of the mini-regrets I have is that I didn’t max out the Roth and 401k contributions when I was in my 20s!

  • I plan on being self-employed, even though I’m just a student. I also have a very simple plan when it comes to my retirement, save more money every day, and invest for the long term.

    • David Ning says:

      That’s a great plan Mark. Why don’t you start a side business now instead of waiting until you graduate? There’s no reason to delay and the earlier you can start earning money, the earlier you can eventually retire!

  • We ran into this two years ago as we started our business. We never know what we’re going to make from month to month and gave in to the temptation of keeping the cash aside as opposed to putting it in the market. It’s understandable, on one hand, but you lose out on that time which is huge. We’re back at it now and both have SEPs that we’re throwing money in each month as well as maxing out our Roth’s.

    • David Ning says:

      Pay yourself first! It’s much harder with an irregular income but what I like to do is to just deposit the day I get checks/direct deposits. This way, there’s no chance a large balance will tempt me into spending more.

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