How To Save For Retirement As A Full Time Entrepreneur
As an entrepreneur, it's very easy to stay focused solely on generating income and profits in your business. Many entrepreneurs have a bulk of their money tied into their business ventures especially in the early stages and as a result have very little financial wiggle room for retirement savings. However, it's very important that you establish a plan to save for retirement early regardless of what your long term business financial projections look like and that plan should be more than just contributing to a traditional IRA.
"It's very important that you establish a plan to save for retirement early regardless of what your long term business financial projections."
Unfortunately, businesses fail or can take a long time to get to the point where they start returning a profit and so relying on your business as your "retirement plan" is not a good approach because you risk lost time as well as the loss of potential earnings you could get from the growth of your retirement accounts and the power of compounding.
That being said, saving for retirement can be tricky for you as a full time entrepreneur due to an inconsistent income and that fact that you have to research and establish your retirement savings on your own compared to if you worked for an employer that has already laid the ground work for you.
However, with a little effort you can create a plan for your retirement and have multiple fronts to build long term wealth - your retirement savings and your business. Here are some tips:
1. Price out the cost of your retirement
A great place to start is to figure out how much you will need to live on each year when you get to retirement (multiplied by the retirement average of 20 to 25 years) so you can set a goal towards how much you'll need to save each year in order to achieve that goal.
2. Setup your retirement accounts
Once you've established the amount you need to save over the long term, it's time to set up your retirement accounts. For small business owners, there are a variety of options to choose from and some examples in the US include:
- The SEP (self employed) IRA
This plan is similar to a traditional IRA in that it is tax deductible and is great if you are the sole employee of your business. You can contribute up to 25% of your income up to a maximum of $54,000 (in 2017) to this retirement account. It's important to note that, if you have other employees you will need to fund a SEP IRA for them as well and make equal percentage contributions.
- The SIMPLE (savings incentive match plan for employees) IRA
This plan is specific to business owners who have 100 or fewer employees. Contributions are taken out pre-taxes and the maximum contributions made into your account cannot exceed more than $12,500 in 2017.
- The Self Employed 401(k) - also know as a solo 401(k)
This plan is specific to self employed individuals with no employees other than a spouse and no plans to add future employees. The great thing about this plan is that you are allowed to make contributions to your retirement savings as the owner of your business and also an employee in your business. The contribution limit is 100% of your salary, up to $18,000 (your contribution as the employee) plus another 25% can be contributed as the employer, up to a total of $54,000 in 2017.
- Regular brokerage accounts / Traditional or ROTH IRAs
If you don't have access to setting up a business owners retirement plan, consider setting up a regular brokerage account with the goal of using it to save / invest for your retirement.
Also, if your income as a full time entrepreneur does not yet allow you to make contributions to max out the account types listed above, start with a traditional IRA (2017 minimum is $5,500) and then you can add-on or change account types as you start to earn more money and are able to contribute more than the maximum allowance of the traditional or ROTH IRA.
3. Keep your investments simple
Once you've established the retirement plan(s) you want to use, it's time to start investing. I highly recommended keeping your investments simple and well diversified via mutual funds, index funds and/or ETFs that align with your investment objectives. Learn more about index funds here and some of the important investing terms you should know here.
Note: If you struggle with finding the right plan, choosing the right kind of investments or determining you eligibility, save yourself the stress and talk to a qualified financial advisor about your financial objectives so they can provide you with the guidance you need.
4. Set reminders to make your contributions no matter how small
If you are a solo-prenuer and you don't have a payroll system in place, ensure you don't miss out on making contributions to your retirement savings, by automating your transfers so they happen each time you get paid. If you have an inconsistent income set reminders on your calendar so you remember to make your transfers manually when you get paid (or pay yourself).
Building long term wealth takes time and if you are a business owner, you definitely want to take advantage of the time you have before you retire to begin saving for your retirement in addition to building up your business empire.
You can learn more about the different plan types mentioned above on the IRS website HERE
Bola Sokunbi is the founder of Clever Girl Finance and she's passionate about helping women take control of their money so they can live life on their own terms.