Retirement Savings for the Self-Employed

When you’re self-employed it is often easy to overlook steps you should be taking to put money aside for your retirement years. In addition, many people think they’ll be running their businesses right through what are considered the “retirement years.”

The truth is, depending on your circumstances – that of your business and your health – you may absolutely need to depend on retirement income.

Here are few steps for the self-employed to consider regarding retirement savings.

How Much Is Enough

First of all, before assuming that you can’t afford to put enough way right now, you’ll need to calculate what your income and expenses might be like. You can do this by looking at any of your existing pensions from previous jobs, and add to that your social security pension. Project what those earnings might be when you would reach potential retirement age.

Then project what your expenses would be at retirement. Include living expenses for housing, food, and medical care. If your retirement income is too small for those projected expenses, don’t assume your business might make up that shortfall. Take steps now to put away enough money in retirement savings to fill in that shortfall.

Note: When working on income projections, remember to take into account inflation.

You Can Put Money Away Now

Many self-employed people feel that between economic pressures, taxes and health care either for themselves or for employees, they simply cannot afford to be putting money away into retirement savings right now.

The key thing to remember is that the earlier you start, the less expensive it is to put away a sizeable retirement nest egg.  With compound interest, just a small percentage of your income once or twice a month is all you may need to generate a healthy retirement savings fund. Treat these savings as you would any other monthly expense.

Your Choices

There are choices as to what you can use to build your retirement savings. Many are familiar with tax-deferred savings plans like IRAs (Individual Retirement Accounts). You can definitely contribute to an IRA but there are instruments created specifically for the self-employed. They include Simplified Employee Pension plans (SEPs), Savings Incentive Match Plans for Employees (SIMPLEs) and Keogh Plans.

You can also invest in stocks and bonds. Work with a financial advisor to determine which combination of lower growth bonds and stable and high growth stocks will be best for your financial goals.

Finally, here’s another tip: you can significantly lower your expenses in the future by choosing to retire to a smaller home in a less expensive area of the country. This isn’t a choice for everyone, but depending on your family preferences and the nature of your business, it may be an ideal alternative.

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