Retirement Planning for the Self Employed

If you’re self-employed, you already know how to plan. You’ve set budgets, carved out your own work schedule, allocated funds for development, and have created dozens of spreadsheets. There is, however, something that many self-employed folks forget to plan for: retirement.

While retirement might feel a long way off during a busy weekday afternoon, retirement is an essential part of your wider financial plan when self-employed. Whether you’re looking to start a straightforward solo 401(k) or are interested in leveraging investment portfolios for your future, there are a few things you need to consider first.

Get Your Accounts in Order

You must get your retirement accounts in order. By having a clear picture of the capital and assets you have saved in retirement accounts, you can head into retirement without any financial surprises. Additionally, if something happens to you, a well-maintained retirement account will ensure that your family can claim any benefits that are owed to them.

Taking the time to order your accounts and clearly establish your beneficiaries will save your family a lot of time, hassle, and hardship. You’ll also want to ensure that your accounts are stored in a safe place and that at least one person (usually the executor of your will) will be given timely access to the accounts when you pass away.

Keeping well-organized accounts will also give you a clear picture of the investments you have made and the dividends you have earned. This helps you create a portfolio with adequate investment diversity, so you can reduce financial risk in retirement and enjoy greater financial freedom.

Diversify Your Investments

Investing diversification can reduce risks and increase your overall profits. Essentially, diversification is all about spreading the capital you invest between stocks, shares, assets, companies, mutual bonds, and other profitable ventures. This means that your overall investment portfolio isn’t jeopardized by law changes, unexpected economic downturns, or volatile markets.

The central idea is simple: if you put all your eggs in one basket, you risk everything. But, by maintaining portfolio variance, you can expect to lower your risks and will potentially see higher returns. However, before you start making investments, you need to understand the best processes for making tax-free investments before retirement.

Understand Your Options

When you’re employed by another person or business, you typically don’t have to spend much time learning about retirement plans. Employers often offer retirement plans with benefits (employer-matched plans, retiree health insurance, etc.) and, as an employee, your route to a 401(k) is quite straightforward. However, as a self-employed person, you need to take the time necessary to become familiar with tax codes and retirement laws.

Solo 401(k)

A one-participant 401(k) follows many of the same rules that regular 401(k) plans follow. However, as a self-employed person with no other employees, you can actually contribute as both an employer and an employee for 401(k) purposes. That means you can defer up to 100% of all earnings up to the annual contribution limit. This is great news, as it means you can invest more of your pre-tax dollars which, hopefully, will provide healthy returns for you.

IRA – Roth or Traditional

There are two kinds of individual retirement accounts—traditional or Roth. Both are effective methods of saving for retirement, and both allow you to take advantage of tax laws. Experian suggests that IRAs are best for new business owners who are looking to roll over funds from prior employers or folks who have maxed out their 401(k) limits. 

  • Traditional: Traditional IRAs are usually partially or fully deductible investments that you can make without using pre-tax earnings. Only when you withdraw from your IRA will your earnings and gains be taxed. The general idea is that you can make an investment and defer the taxation until you take a distribution.
  • Roth: A Roth IRA is slightly different from a traditional IRA because you make your investments with post-tax earnings and gains. However, when you withdraw your investments, you do not need to pay tax. Experian also notes that “withdrawn earnings are generally subject to taxes and penalties if you are under 59½ and have had the account less than five years”. As such, you need to consider your age and wider financial situation before choosing a Roth IRA.

Emergency Funds

Investments that grow your overall portfolio can make a huge difference to your financial retirement plan. However, before you get too carried away, you need to ensure that you have appropriate emergency funds ready.

The amount you contribute to an emergency fund depends on your situation but should allow you to cover any mishaps or accidents that you cannot predict. Financial managers can help you set an appropriate number for your emergency fund, but you can also utilize emergency fund calculators for an estimate. Maintaining a full emergency fund gives you the freedom to make financial investments, and allows you to focus on the thing you want to do during your retirement.

Moving Forward

Retirement is a vital component of financial planning for the self-employed. At first, it can be overwhelming to consider the different investment plans and saving accounts available to you as a self-employed person. However, by taking a proactive approach towards your retirement, you can ensure that both you and your family are set up for the future.