self-employed business

Self-Employed? Your Guide to Saving for Retirement

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Retirement may seem like some far-off destination that will never be reached, but it’s coming faster than you realize. As a self-employed business owner, you have to be extra cautious that you aren’t avoiding this all-important component of your financial future.

It’s Time to Think Seriously About Retirement

The problem with retirement is that nobody spends much time thinking about it until it’s right around the corner. After all, how realistic does retirement seem to a 30-year-old on the front end of her career? To her, it’s literally a lifetime away. To a 60-year-old worker, however, retirement is always a thought. But ironically, it’s the 30-year-old who thinks about retirement three decades in advance that can retire comfortably—not the 60-year-old who decides to come up with a five-year plan.

Saving for retirement is something that must start very early in your career—especially as a self-employed business owner who doesn’t have access to the same traditional retirement plans that W-2 employees have available to them. The longer you wait, the deeper your hole gets.

Here are a few specific things you need to think about and/or take action on: 

1. Determine Your Number

While it’s impossible to accurately predict your exact needs at retirement, it’s smart to set a goal early on. In other words, make an attempt to determine how much you need to retire.

There are some different online calculators and rules of thumb people use to come up with a “number.” One guideline says that you should save 10 percent of your annual income while working, which will allow you to withdraw 4 percent from your retirement savings annually. Another rule says you need to have your annual earnings in retirement savings by the time you’re 30, and six times your annual income in savings when you reach 55.

The problem is these simplified guidelines don’t do a good job of accounting for all of the nuances in your life. You’ll also want to factor in your retirement goals, additional aspects of your financial portfolio (such as other investments and/or income-producing real estate), and Social Security.


2. Know Your Options as a Self-Employed Business Owner

As a self-employed business owner, you don’t have access to a traditional employee-sponsored 401(k) plan with matches. You do, however, have options like these:

401k’s allow you to leverage automated services such as a Robo Advisor Canadian investing firm Wealthsimple have provided a breakdown of the best Robo Advisors on the market.

  • Roth IRA. One of the most popular retirement options is the Roth IRA, which allows you to invest after-tax dollars (up to $5,500 per year). This means your money grows tax-free, and 100 percent of the value can be enjoyed in retirement.
  • SEP IRA. A SEP IRA is slightly more complicated to get started, but has some additional benefits that a Roth IRA doesn’t offer. One of the biggest advantages is that you can invest up to 25 percent of net earnings (up to $53,000 per year).
  • Solo 401(k). For business owners, a solo 401(k) is a solid option. It allows employers to contribute up to 25 percent of net earnings. If you’re a sole proprietor, you can go as high as $18,000 per year.

Find a plan that gives you the best chance of reaching your long-term retirement savings goals.

3. Practice Self-Discipline

The three keys to saving for retirement are time, consistency, and patience. In order to make these keys work for you, self-discipline must be cultivated. The more you’re willing to say no to certain short-term pleasures, the greater your chances are of enjoying long-term gains.

Don’t Put off Retirement

The power of compound interest is what makes investing so valuable. It’s also the number-one reason why you need to start investing at an early age.

To give a better picture of why this is true, Andy Kiersz of Business Insider has created a hypothetical example of two savers, Emily and Dave. In his illustration, 25-year-old Emily begins putting away $200 per month into a retirement account with a 6 percent average rate of return. Dave, age 35, begins putting away the same amount with the same average rate of return. Both continue to tuck away $200 per month until they retire at the age of 65.

By the time each is ready to retire, Emily has contributed $96,000, while Dave has contributed $72,000. The only difference in their contributions is Emily’s 10 years of additional contributions. And despite the fact that Emily has only invested $24,000 more than Dave, her account is almost twice the size. Emily has $402,492, while Dave has just $203,118.

When you put off retirement investing, you’re only hurting yourself. As a self-employed business owner, your retirement may look different than the average employee—but you still have plenty of options. It’s never too late to start.