Saving for Retirement: Entrepreneur Edition

Guest article written by Jessica Larson, SolopreneurJournal.com

As an entrepreneur, one of the things you’re probably most passionate about (besides your family) is your business. Still, that doesn’t mean you want to be doing it forever. Eventually, you’ll want to retire. And, saving for retirement is crucial.

When you work for yourself, there’s no company-sponsored retirement plan or 401(k) match, so you’ll have to take the initiative to save for retirement on yourAfrican American entrepreneur smiling while she looks at her iPad. own. And, speaking of families, you’ll want to make sure you take the right approach for your family, as well as yourself.

With these thoughts in mind, here are some tips on saving for retirement:

Explore your options

For retirement savings, you have a variety of options available. Do you want a traditional, Roth, Simplified Employee Pension (SEP), or Savings Incentive Match Plan (SIMPLE) IRA? Or would you prefer a solo 401(k)? Each option has its pros and cons, as this comparison chart shows.

A traditional IRA comes with an annual contribution limit for 2021 of $6,000, or $7,000 for those 50 and older. A Roth IRA is similar, but one of the greatest differences is that the withdrawals are tax-free. A SEP IRA (for self-employed people) is for small-business owners with 25 or fewer employees who are looking for big tax deductions. The contribution limit is $58,000, or up to 25 percent of your net self-employment earnings, whichever is less.

If you’ve got a larger business with 100 or fewer employees, a SIMPLE IRA—with a 2021 employee contribution limit of $13,500 (or $16,500 for those 50 and older) plus an employer match of up to 3 percent of the employee’s salary— might be worth considering. You defer taxes until retirement, and they’re paid upon distribution.

A solo 401(k) works the same way an employer-provided 401(k) does, except you’re both the employer and employee, so you can make an additional contribution of up to 25 percent of your net income through self-employment. But this only works if you have no employees other than your spouse and/or business partner/s. The combined employee and employer 2021 contribution limit is $58,000, or $64,500 for those 50 and older.

While most IRAs and employer-offered qualified retirement plans are invested in stocks, bonds, and mutual funds, many savvy entrepreneurs work with self-directed IRA custodians so they can invest in alternative assets. Because entrepreneurs typically prefer to take greater control of their earning potential, working hours, and costs, often they also enjoy picking the assets that their retirement funds invest in — assets like real estate, private mortgages, precious metals, and cryptocurrency, to name a few.

Check your earnings record for SSI

If you’re counting on Social Security for a significant portion of your retirement income, you’ll want to keep track of your earnings record.

Here’s how it works: Social Security uses a formula to determine your monthly payment that’s based on your highest 35 years of earnings, combined with other factors. The more you made (up to the maximum) for those years, the more you’ll get every month. Your goal as an entrepreneur will be to strike a balance between keeping money in your business and paying yourself a salary.

Keep an eye on your credit

It’s always a good idea to maintain good credit, but that’s even more true once you’ve retired and no longer have a job. Your credit history is the most important factor in determining whether you’ll be approved for a loan. The good news is that you can keep track of it for free by downloading a copy of your credit report at annualcreditreport.com.

Assuming you don’t have a lot of money socked away, you’ll need to be in good standing if you want to buy a new vehicle or make another big purchase — for example, to downsize to a smaller home. But that’s not all: Having good credit can potentially save you a significant amount of money in interests costs on your mortgage loans, credit cards, and auto loans. That’s money that can go straight into your retirement fund.

Pay off debt, save, or both

It can be a tricky balance between paying off debt and socking away cash for retirement. You’re essentially choosing between the amount of interest you’d be paying on what you owe and the amount you’d be racking up — along with potential tax advantages — by saving for retirement.

The details of your particular situation will dictate which path you choose and what kind of balance you strike between the two. If you’ve had retirement savings accounts in place for a while, you might be able to spare some extra funds to reduce your debt. If your debt principal and interest rate are relatively low, you might be able to spread the money more evenly between the two.

Plan for the unexpected

You never know what’s around the next corner, so it’s important to be prepared. A business succession plan is imperative if you hope for your business to continue operating “within the family” after you step away. Or, alternatively, draw up papers to have ready for a future sale.

Your will, power of attorney, the executor of your estate, health care directives, and burial or cremation arrangements should all be components of your estate planning checklist. Make sure your retirement plan beneficiaries are up to date and they know what types of assets you’ve invested in.

If this all sounds like a lot to think about, consider working with a financial advisor to map out your future. Saving for retirement isn’t necessarily simple, especially for a self-employed entrepreneur or small-business owner. But this list of tips can get you headed in the right direction.

 

Bio: My name is Jessica Larson. I’m a married Midwestern mom and a solopreneur. I create online courses for students, and I’ve started and run several other businesses through the years. My goals are to support my family while still actually spending time with them, to act as an entrepreneurial role model for my two daughters, and to share what I’ve learned through The Solopreneur Journal.