As a small business owner or a person that works out of their home, you may think that you have fewer options for saving for retirement than a person who spends their entire career working for somebody else‘s business or company. While it’s true that you won’t have access to a pension plan if you work on your own, there are still many options open to you.
One statistic that is a little bit concerning is that nearly 30% of people that are self-employed have not saved anything for their retirement. That’s not good matter how you slice it. While it’s true that if you own your own business or work from home you can certainly keep working well past the regular retirement age, there will ultimately come a time in everyone’s life when they’re just not able to work anymore or earn enough money to pay for everything that they’re going to need. It’s with that in mind that we put together this blog article about how to save for retirement if you’re self-employed. We hope it gives you some good ideas and valuable information so that you can start to put money aside for yourself starting today. Enjoy.
Frankly, there are quite a few different ways that a self-employed person can save for retirement but the hardest part is simply having the willpower to put your money somewhere safe and let it stay there. Without the benefit of having money automatically deducted from your income and put into a retirement account like a 401(k), the responsibility falls squarely on your shoulders if you work on your own. On the other hand, you have access to many of the same investment opportunities that most people who work for others have and, even better, there are opportunities for you to save even more with certain tax-deferred accounts.
If you want to start but you won’t be putting in over $5000 a year an Individual Retirement Account or IRA is probably your easiest option. Setting up and IRA can be done quite easily at most banks although doing so will virtually guarantee that you will pay higher fees and possibly lose quite a bit of money over your working career. It would be better to contact a mutual fund company (T. Rowe Price or Vanguard come to mind) and set up an IRA with them. Once it is set up you can transfer money directly from your checking account into your IRA with very little effort.
If you’re not educated as far as investing (and it’s okay to admit that) a good option for you is possibly an S&P 500 index fund. This type of investment will charge you approximately 0.1% 0.2% of the value of your account per year for fees whereas with most banks you’ll be paying 3% or higher. (Most likely higher.) When you consider that a 7% per year gain is about average you can see that setting things up with your bank means losing approximately half of your profit every year, numbers that over time (and taking compound interest into account) can add up to thousands if not hundreds of thousands of dollars lost to bank fees.
Getting back to being educated about investing, while it’s okay to admit that you might not be Warren Buffett it would behoove you to take some time once a week and start doing some research and educating yourself. With the wealth of information to be found online all you need to do is put “mutual funds explained“ or something similar into your browser bar and your search engine will spit back literally millions of pages of information that you can start using.
If you make enough to put more than $5000 into your retirement account every year you might do well to consider a Simplified Employee Pension Individual Retirement Arrangement (SEP IRA). All of the major brokerage firms offer them (Charles Schwab and Fidelity to name just 2) offer this type of plan and you can actually contribute up to 25% of your net income until you reach $51,000. (That’s for this year, 2013.) Just like with an IRA any contributions you make to your SEP IRA are tax-deductible.
Lastly there isthe Solo 401(k). With this retirement account you can defer up to $17,500 and also invest up to 25% of your net income just like with an SEP IRA. If you go to the IRS website you can also get IRS Publication 560 and a number of worksheets that will help you to figure out exactly the amount that you are allowed to put into these accounts. One caveat is that, although you can put a large amount into a Solo 401(k), it can be a bit complex and there are a number of extra expenses involved in managing it. For this reason it might be a good idea to work with a financial advisor or accountant when you set one up.
Hopefully this blog has given you some valuable information that you can use to start saving for your retirement sometime very soon. Frankly, there’s no time like the present to get started and this information is really all you need to do so. We hope you enjoyed it and that you come back often as will be presenting much more valuable financial advice in the future. See you then.