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Retirement planning can seem like a daunting task—especially for self-employed individuals without access to traditional 401(k)s. And as an entrepreneur, creating a plan to step away from your business is likely not your number-one priority.
But when it comes to retirement planning, time truly is money: The longer you withhold your investments, the more you’re missing out on the opportunity to grow your nest egg.
Fortunately, you don’t need a conventional 401(k) to set aside retirement money. With these eight tips, you’ll save—and supercharge—your hard-earned income.
The first step in safeguarding your stress-free retirement is to open a tax-advantaged account ASAP. These four alternatives to 401(k)s are great options for entrepreneurs.
The SEP-IRA is a good option for a self-employed individual because you can contribute up to 25% of your annual earnings. You can also choose to contribute a smaller percentage of your compensation during slower years.
In a SEP-IRA, the employee’s annual contribution must match the employer’s. So, if you’d like to contribute the maximum 25% of your salary after a lucrative year, you must do the same for all of your employees—a limiting factor for small enterprises with employees but an opportunity to boost savings for a single self-employed business.
The Solo 401(k) is essentially the same as a conventional 401(k). The difference? It’s in the name: Only self-employed individuals with no employees, plus their spouses, are eligible for this plan.
Under this plan, the account holder can elect to defer up to 100% of her earned income. In addition, the account holder can top up her account by contributing up to another 25% of her compensation per year.
Be advised: The account holder is required to file an annual report if her business acquires $250,000 or more in assets.
Traditional and Roth IRAs are similar. Annual investment amounts, for instance, are the same for both.
Here’s the major difference: Contributions to the Traditional IRA are made in pretax dollars and are tax deductible. Contributions to the Roth IRA, on the other hand, are made after tax, but withdrawals in retirement are tax-free.
Further, contributions to a Roth IRA are made according to your current tax bracket—not the tax bracket you’ll be in when you retire. That makes the Roth IRA a good option for self-employed folks at the beginnings of their careers. If you expect to be at a lower tax bracket by the time you retire, a Traditional IRA might be a better choice for you.
The SEP-IRA, One-Participant 401 (k), and Traditional or Roth IRA are all defined contribution plans. But you may also want to consider Defined Benefit & Cash Balance plans.
Unlike other self-employed retirement plans, Defined Benefit and Cash Balance plans allow much larger contributions, so you can turbocharge your savings. Those six-figure-plus contribution limits may help you lower your tax bracket, too. By lowering your adjusted gross income, you might qualify for the new 20% deduction available to certain pass through entities, like LLCs, S-Corps, and sole proprietorships.
There are a few other differences between defined benefit plans and defined contribution plans. Essentially, though, Defined Benefit and Cash Balance plans may be ideal for small business owners with less than ten employees; who earn consistently high incomes; and who wish to maximize tax savings and save for retirement quickly.
So, you’ve opened your tax-advantaged savings account. Congratulations! Now it’s important to know when—and how much—to invest to keep that nest egg growing.
Spreading your investments among a range of assets means a greater chance of reward in the long run, plus a safeguard against market volatility. You can’t go wrong with investing in a mix of stocks, bonds, and cash.
If you’re further from retirement age—and able to stomach a drop in your portfolio value—you might consider investing more in stocks than in bonds. If you’re closer to retirement age, you might consider leaning more heavily toward stable bonds and lower-risk stock investments. Generally, cash investments offer the lowest return compared to other investments.
To minimize volatility and increase potential earnings, also consider diversification within those three asset classes.
Target-date funds are mutual funds that automatically rebalance stock and bond investments over time. The titular “target date” refers to the year that the account holder plans to retire, and the fund manager decides how to rebalance the account holder’s assets accordingly.
These funds are an attractive option for those who don’t want to worry about actively monitoring their investments. However, the formulaic mix of stocks and bonds also means these funds might lack the flexibility to shift assets into promising trends or pull out of weaker ones.
No matter how you choose to design it, think of your asset portfolio as a living document: Due to changes in the market, your portfolio’s total value fluctuates over time. Make adjustments according to big trends or shifts in the market, a turnover in the calendar year, and major life events such as buying property or having children.
However, most advisors agree the best strategy is to save what you can and, once you’ve made your investment choices, leave the money alone and let it work for you.
According to a survey by Manta, 34% of small business owners don’t have a retirement savings plan. Of that 34%, 37% say that they don’t have enough money to save for retirement.
While there’s a cap on contributions to all of these accounts, there’s no minimum required. Setting aside a few thousand dollars this year will make a difference in the long run. You might have to cut corners elsewhere—sayonara, daily vanilla latte!—but the peace of mind you’ll gain will be worth those small sacrifices.
For small business owners, keeping personal and business finances separate is crucial. Clearly differentiating between the two ensures that you accurately complete your taxes, simplifies applying for business loans, and maintains the “corporate veil”—the separation between the personality (or business owner) and his or her company. And that separation protects the personality from becoming liable for the company’s debt.
(Need help determining the best business bank account for you? Check out our comprehensive guide.)
Maintaining separate, personal checking and savings accounts also makes setting aside retirement money logistically simpler. Once you know exactly what’s in your own bank account, you can determine how much you’re able to contribute to your savings plan, and take action steps accordingly.
It’s crucial to make sure that you’re transferring funds between your business and personal accounts correctly. To maintain that corporate veil, for instance, all business earnings must first be deposited into your business bank account before being transferred into your personal account. If possible, we’d recommend opening both accounts at the same bank for ease of transferring, and contact your bank if you have any concerns.
After you’ve separated your personal finances from your business finances and established a separate retirement fund, you can calculate how much money you’re able contribute to that fund each month. Luckily, free online tools and apps make this process a lot less time-consuming.
If you need help with daily budgeting, try Mint. The iOS and Android app virtually organizes all of your finances. You can link up to your bills, bank accounts, credit card use, and provide income information and track your investment portfolio. Plus, you can set a budget and then clearly track how close or far from the mark you are according to your net worth, monthly expenses, and smaller-scale spending habits.
If you want to monitor your investments, download Personal Capital. It’s a great tool for wealth management. You can track your investments, analyze your cash flow, and even compare the impact of college tuitions on your net worth. There’s also a dedicated retirement planning feature that lets you set your retirement goals and assess your progress toward that goal.
Need help crunching numbers? Online calculators like MarketWatch Retirement Planner, Vanguard, and Financial Calculators easily help you figure out how much money you’ll need in order to retire comfortably.
Out of sight, out of mind: With just a bit of planning, it can apply to your retirement savings, too.
After you’ve determined how much cash you can contribute to your savings plan, you can set up an automatic transfer between accounts. This means that your bank shifts a specified amount of cash from your checking to your savings account at regular intervals, usually every one or two weeks. Alternately, you can choose to contribute a portion of your paycheck directly your retirement fund.
You can always revisit and adjust the amount during slower periods, but the benefit of a default transfer is that you don’t have to put the thought (or the emotional labor) into manually handling your money. Plus, many banks make it easy to establish recurring transfers online.
We get it—it’s hard to save a portion of your hard-earned cash for an unspecified future date. And as humans, we’re typically not programmed to think that far in advance. But trust us, 10, 20, or 30 years from now, you’ll thank your younger self for preparing for your later years. Hopefully, these tips will help ease the journey.