According to a study by Ameritrade in 2012, there are 10 million self-employed Americans. Of these, 70% do not regularly save for their future years, and 28% aren’t saving for retirement at all. These entrepreneurs are often so invested in expanding their businesses that they neglect to strategize for their own retirement.
The challenge of being self-employed involves balancing many financial responsibilities – earning an income, paying personal bills, managing self-employment taxes, and growing the business. Amidst all these tasks, it can be tempting to push retirement planning to the backburner until the business is more established.
However, it is crucial to start saving for retirement early on to reap the benefits of compounding interest, thereby making your money work for you. Additionally, retirement contributions can often be tax-deductible. Though it may complicate your tax return a bit, it’s undoubtedly a deduction worth incorporating.
If you’re unsure of where to start saving for your retirement, consider these three popular investment options:
1. SEP IRA: This Simplified Employee Pension IRA is available to self-employed individuals, small business owners, and freelancers alike. In this set-up, only the “employer” can contribute, not the employees.
2. Solo 401(K): This retirement plan is designed for businesses employing only the owner and their spouse. You’re not required to be full-time self-employed to benefit from it. As both the employer and the employee, you can contribute a substantial amount into this plan.
3. Traditional or Roth IRA: These types of IRAs are open to everyone irrespective of their employment status. Contribution limits are based on income levels, and both deductible and non-deductible versions are available.
However, finding funds for your retirement plan might be challenging, especially with the fluctuating income characteristic of self-employment. Here are some strategies to handle this:
– Build an Emergency Fund: Before focusing on retirement savings, secure 3-6 months of your necessary expenses for unexpected circumstances.
– Pay Yourself: Save a certain percentage each month just like you would if you were receiving employer-matching contributions.
– Automatic Withdrawals: Set up automatic deposits into your retirement account to avoid the temptation of using the money elsewhere.
– Windfalls: Use unexpected income like tax refunds to fund your retirement.
– Set a Schedule: Contribute at regular intervals to take advantage of long-term investing principles.
– Tax-Time Commitment: With each self-employment tax filing, evaluate your financial situation and decide how much to put into retirement.
– Mix Methods: Depending on your income situation, you can combine strategies.
Being self-employed can be daunting, especially when there’s no guarantee about your income. However, preparing for the future by assiduously saving for retirement can provide a sense of financial security. If you’re self-employed, how do you handle retirement savings?
