Reinventing Retirement as a Self-Employed Entrepreneur

5 Ways to Prepare

Self-employed people enjoy several perks, including the flexibility of getting off work before 5 p.m. But one downside is losing their employer-sponsored retirement benefits.

Thankfully, they can mitigate this challenge by planning their retirement on their own. Learn about the few mistakes to avoid, plus five ways to successfully retire with sufficient funds.

5 Mistakes to Avoid When Planning Retirement

Creating a retirement plan and laying out a step-by-step process sounds easy. Yet mistakes are inevitable for many business owners. Here are five of them.

1. Delaying Retirement Plan For Later

When it comes to savings for retirement, time is everybody’s best ally — thanks to compounding interests. But many entrepreneurs overlook or ignore this considerable advantage and postpone savings for retirement until they’re 40 or 50 or when their business is in a better situation. They should leverage time by saving now.

2. Investing Retirement Money in Risky Options

The Internet has made several investment vehicles accessible to self-employed individuals. Along with this advancement are the widespread ultra-risky money schemes offering impressively high returns with an equal level of risks.

Many who lack knowledge get enticed by these ventures and end up losing all their hard-earned retirement savings in an instant. It’s best to avoid Bitcoin, options, forex trading and risky investments. Choosing low-risk is the safest way to build retirement funds.

3. Not Diversifying Retirement Portfolio

People with financial literacy don’t put all their eggs in one basket because if that single investment fails, there’ll be no alternatives. Diversifying allows business people to adjust or divide the risk between all their assets. It also helps protect their capital if they lose money in a single investment.

4. Cashing Out Savings to Fund Business

Starting a business requires huge cash, but many borrow from their 410(k), which has adverse financial consequences. For one, it could incur taxes, and failure to repay the loan on the due time could be interpreted as a distribution and result in bonus penalties.

5. Not Working With a Financial Advisor

The tax policies can be overwhelming for entrepreneurs without a relevant background. Financial advisors do most of the legwork in money management and avoiding financial mistakes. These professionals have comprehensive tax knowledge and can help with tax issues and resolutions and investment planning.

5 Ways Self-Employed People Can Prepare for Retirement

It can be a challenge for small business owners to set aside funds for their retirement. One reason is the lack of information as they don’t have an HR staff to ask questions from. Fortunately, these five steps outline how to prepare for the golden years independently.

1. Set up a Retirement Account

There are three options for self-employed, solopreneurs or contractors with zero or few employees.

• Solo 401(k): This option is for those with zero employees, except if their spouse works for them. It works similarly to a traditional 401(k), allowing them to contribute up to a maximum of $66,000 for 2023.
• Simplified employee pension (SEP) IRA: This savings is for self-employed people without or few workers. It’s treated the same way as traditional IRAs when it comes to tax purposes. Contributions are tax-deductible, a benefit that helps lower the tax bill. If they contribute to their three employees’ SEP IRAs, they receive a tax deduction.
• Defined benefit plan: Also known as a traditional pension, this plan offers those with zero or few employees — but with more money — a choice to save for retirement on a continuous basis. Compared to other options, it has a higher contribution limit of $265,000 for 2023 and has the benefits of tax-deferred and deductions for specific contributions.

2. Roll Over to a New Retirement Plan

The next step for employees-turned-businessmen is to roll over their old 401(k) directly into any qualified retirement plan. Direct rollovers don’t incur taxes or penalties. In addition, consolidating their savings into one account makes it easier to manage and track savings.

Managing investments can consume time, so pooling everything into one account is a time saver. It can also simplify the loan process and increase the amount they can borrow if they consider it in the future.

The process is straightforward. Business owners should contact their plan administrator to fill in the paperwork for the rollover.

3. Outline a Long-Term Savings Plan

A good strategy for self-employed individuals is to divide their retirement goals into timeframes — for instance, in increments of five years — and create financial milestones. They can start with a 5-year plan with the intent to increase the savings by a certain amount or percentage every year.

After achieving the first mark, their succeeding goal can be to add more eggs to the nest by maximizing the contribution limits. It’s easier to achieve long-term financial goals when they are broken down into actionable steps.

4. Move to a Retirement-Secure Location

With inflation and sky-high costs of commodities, a factor to consider for retirement is relocating to a state with friendly tax policies and an affordable cost of living to stretch every dollar. Moving to a smaller city sure has downsides — like less public transit — but it has undeniable financial merits.

Some states have high rent and expensive health care, making them impractical to live in. For example, Florida is hailed as an ideal retirement location for its warm weather and sunny days, but the Medicare out-of-pocket expense racks up to $2,014. Furthermore, 42.5% of senior households spend more than 30% of their retirement income on housing alone. Meanwhile, if you move to Pennsylvania, you can maximize your savings.

Business owners must thoroughly research to know their choices and balance their options before making a huge decision.

5. Work With a Financial Advisor

Collaborating with a finance professional can help small business owners make better money decisions. From budgeting, managing debts, savings for retirement and choosing investment channels, an advisor possesses a wealth of fiscal knowledge to support anyone who wants to meet their financial goals before leaving the workforce. Hiring them costs fees, but working with the right professional is worth it.

Implementing Retirement Goals Can Be Simple

Unlike full-time workers, where the organization has an HR team to assist employees in planning and building their retirement savings, self-employed individuals mostly have to do it single handedly.

Those without experience or who need more information about rolling over accounts or outlining a long-term savings goal can work with a financial advisor to get suggestions.

By following these five steps to planning for retirement, they can secure their future.