Saving for Retirement When You’re Self-Employed

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entrepreneur-593378_960_720Whether you’re just getting started with your own business or you’ve been a freelancer for years, saving for retirement is often one of the more neglected aspects of self-employment. So much effort goes into making sure that you have enough money to cover your major expenses and “keep the lights on” that many entrepreneurs simply forget that they should be saving for their futures as well. In fact some business owners might not ever be aware of all of their options for retirement savings.

If you’re self-employed and looking to start saving for retirement, the best thing to do is figure out your budget, research your options, and then start savings. Here’s a quick guide to get you going:

Budgeting

For freelancers or other self-employed individuals, one of the biggest obstacles to saving for retirement is dealing with an erratic income stream. Furthermore, while many workers have the added bonus of employers matching their contribution, the self-employed are on their own. For these reasons getting your budget in order is the absolute must first step to saving for retirement.

Creating a budget

The biggest goal of creating a budget is to understand how much you absolutely need to make in order to stay afloat. To find this number add up all of your essential bills: rent/mortgage, utilities, car payments, food, etc. Ideally these will total up to no more than half of your projected income. If they make up a larger chunk than that you may want to consider ways to minimize your overhead by relocating to an area with a cheaper cost of living, taking a closer look at how you can save on groceries, or reevaluating your transportation situation. For example, if you’re working from home, you may decide that family may no longer need two or more vehicles.

Once you’ve accounted for bills you must pay, total up how much you tend to spend in other categories such as entertainment (which could include dining out), subscriptions, clothing, etc. by looking at your past two to three credit card and banking statements. This is where you may see room to make cuts or changes and can set goals accordingly.

With these numbers as a jumping off point you can then decided how much you should be spending in each of these categories going forward. Combined these should take up no more than 30% of your income but the lower the better. That way you should still have at least 20% you can save in the short or long term. Again, if you can save more, do it — you’ll thank yourself for it later.

Tips for smoothing out your budget

Now that you know how much you need to spend every month the trick is make your unpredictable salary slightly less chaotic, making the fat times cover the lean ones. Unfortunately there’s really not a simple way to do this entirely but there are at least a couple of tricks you can try. The first is to look at your billing due dates and see if you can move them around to spread them out within the month. Often times this can be accomplished by visiting the company’s website or calling their customer line and simply asking. This way you won’t have to worry about all of your bills coming due at the same time — something that can be especially painful if you’re waiting on an invoice payment.

Going back to your budget, another helpful tip is to base your calculations on the worst-case scenario. For example, if your electric bill is $120 in the winter but gets as low as $30 during other times of year, use the $120 figure for your budget. Not only will this help you to prepare for the months where you bill really is that high but will also lead to a surplus you can tap into, including those aforementioned times when a client is late to pay you. 

Bookkeeping

Perhaps the largest monetary transitions freelancers and the self-employed make from traditional employment is accounting for the taxes they will have to pay (not to mention making those tax payments quarterly instead of just on April 15th). For that reason you may want to invest in bookkeeping software that will help estimate what taxes you will owe. Services such as Quickbooks self-employed will allow you track your business mileage, separate your business and personal expenses, and more, making it easier to budget for both your business and yourself.

Quickbooks and others do charge a monthly/annual fee to use their software but the good news is that you can write those off as business expenses. If you’re just getting started with freelancing or have never been good with taxes or bookkeeping it may be worth investing in such a program to help you better plan your finances.

Retirement account options

There is no shortage of ways for how you can save for retirement and what you can invest your money in. From IRAs to 401(k)s there’s a lot to think about when deciding which account is right for you. Here’s a brief look at a few different options:

IRAs

When it comes to retirement savings, individual retirement accounts — better knows as IRAs — are probably the most popular options. There are several kinds of IRAs to consider depending on your situation. Also, different financial service providers will offer different products so it can get a bit confusing. However, at their core, IRAs allow you to save money tax-free until you retire and can either be invested in securities, funds, alternative investments or kept in less volatile places, such as money markets.

As mentioned IRAs can be invested in a number of different ways including stocks, bonds, mutual funds, and CDs. Additionally, self-directed IRAs are growing in popularity and allow you to invest in a greater variety of options including peer to peer lending or even real estate.

In fact, you could potentially use your self-directed IRA to invest in your own company. For example, Able Lending provides startup and business growth loans and. as part of their platform, individuals can invest in those loans. Business owners can use funds from a self-directed IRA to invest in their own business, which not only earns interest from the loan payments that is taxed under the IRA rules but also helps to lower the interest rate Able charges the business on the loan.

Although the benefits of an IRA are clear there are limits to how much most people can contribute per year. Currently that limit is $5,500 a year if you’re under age 50 and $6,500 a year if you’re over 50. However, if you already have a 401(k) from an old job, you can typically roll that money into a new IRA without penalty and without worrying about the contribution limit.

The good news is if you are a business owner you can setup a SEP (Simplified Employee Pension) IRA. SEP IRAs have the same tax benefits as traditional IRAs but have much higher annual limits. SEP IRA annual limits are 25% of your annual compensation up to $54,000 a year for 2017. 

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Solo 401(k)

If you have the means to stash more cash away for your retirement a solo 401(k) might be right for you. Just as traditional 401(k)s allow employees to contribute as well as employers, solo 401(k)s acknowledge that you are playing both roles in this scenario and allow you contribute more as a result. Currently the annual limit is $18,000 or up to $24,000 if you’re over 50 years old.

There is one major catch with a solo 401(k): you are only eligible if you have no other employees. However the rules do allow you to employ your spouse and have them contribute to your solo 401(k) as well. If you do hire your spouse their contributions are also limited to $18,000 a year if they’re under 50 and $24,00 if they’re over 50 years old. 

The benefits of Roth

You’ve likely heard the term “Roth IRA” and wondered what that proper noun serving as an adjective really meant. Basically a Roth retirement account allows you to pay taxes on the money you’re saving now instead of paying when you take the money out. This could lead to some lucrative savings since your gains will not be taxed as long as you wait until you’re over 59 and a half to withdraw.

Speaking of withdrawals, since you’re already paying taxes on the money, you are able to access your Roth IRA principal (not your gains) at any age without penalty. While it’s not recommended that you take from your retirement savings unless you absolutely have to, it is comforting to know they’re there just in case. For those reasons, if you can afford to go Roth, it’s worth doing and it will pay off in the long run.

Saving with your spouse

One other option you may want to consider for your retirement savings is utilizing your spouse’s 401(k). For example, if your significant other’s employer offers a 401(k) plan with matching, it likely worth paying extra into that plan to 1) max out the matching offer and 2) offset your lack of savings. If nothing else this could be a good way to get started saving until you’re making enough to open your own account. Plus, if employer matching is available to your spouse, be sure to take advantage of that in any way you can and for as long as you can.

When it comes to starting and running businesses most entrepreneurs have big dreams and plans. Unfortunately all too often those plans lack a way of saving for retirement. Don’t get so wrapped up in the excitement of today that you forget about tomorrow — create a budget, find ways to reduce your overhead and smooth out your income, and look into opening a retirement account to set money aside in. Best of luck!

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