Will You Ever Be Able to Retire? How to Start Planning Now

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RetirementA common concern among freelancers and small business owners is whether or not they will ever be financially secure enough to retire. Without an employer-supported retirement plan, many of us don’t have the resources to create a structured savings plan that will carry us in our later years.

The Wells Fargo/Gallup Small Business Index survey conducted last year found that most small business owners don’t plan to “fully” retire. The survey results showed that 38% will retire or cut back on their work at a different time than they had originally planned. And 6 in 10 of these owners will be delaying retirement for financial reasons.

While some of the reasoning behind this is inspiring – nine out of ten small business owners simply enjoy what they do and want to continue doing it – it can be a little discouraging. As self-employed professionals, is retirement a fruitless dream?

The good news is that it doesn’t have to be. Here are some ways you can get on the right track now so you are in a position to retire later on if you so choose.

Consult a Financial Advisor

There’s really no better way to get started planning for retirement than hiring a professional. A good financial planner will be able to take a look at your business and personal finances and help you figure out a realistic long-term retirement plan.

They will analyze your current age and the age you want to retire in order to determine what the “cost” of retirement will be. A financial consultant will be able to make solid recommendations you can start to work on immediately. And ideally, your advisor will also continue to support you as your business grows and life changes to modify your plan so it stays realistic for the long haul.

Consider a SEP IRA

A Simplified Employee Pension Individual Retirement Account (SEP IRA) is a plan available to business owners in the U.S. that provides retirement benefits for themselves and their employees, if they have any.

One of the biggest benefits of a SEP IRA is that there are no significant administration costs for a self-employed person with no employees. Plus, contributions do not have to be made every year, so your contributions can be flexible like your income.

There are also other plans available to U.S.-based businesses you’ll want to explore, such as a Keogh Plan and a Solo 401(k). And if you’re not in the U.S., search for self-employed pension or retirement plans for your location — i.e., a Small Self-Administered Pension Scheme (SSAPS) in the UK.

Get Used to Budgeting

The more familiar you become with your business finances, the better off you will be, not only in terms of retirement, but for the financial health of your business. If you don’t have a rolling budget for your business, create one now. And if you do, keep it current and you can use it to make projections for the future.

The key to any kind of retirement planning, especially for the self-employed, is starting as early as possible, doing your research, understanding your options and making a plan. I will be looking into and formalizing some of these processes myself to create the future I want.

What about you? Are you worried about retirement or do you plan to work as long as you can?

Image credit: Craig Jewell

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  • http://www.brightbridge.net allspiritseve

    What happened to the ol’ Roth IRA? Shouldn’t that be maxed out before considering a SEP IRA?

  • Antonette Artiz

    Great post. I have a SEP IRA and it is because I worked with a financial planner. So you are definitely right on about that financial planner person. Sometimes it feels like there will never be enough to retire, but it will come. I still have 20 years to go before I will really want to sit down. :)

    Thanks,
    AA

  • Steve

    IRA’s suck. You’d get better returns investing a fixed amount at regular times (each week) in a big name stock.

    An important thing to consider: Take 10% of everything you make, and automatically put it in a savings account. Make it like an expense that gets take away before you’r tempted to spend it, even for food. That means every thing you invoive for, take 10% of the payment recvd and put it away for savings. Otherwise you wind up working your ass off and then realize you don’t have anything to show for it.

    Also when you contract with a financial advisor, be prepared to spend a lot of money on insurance, i.e. disability income protection (if you become disabled the insurance will pay 70% of your previous income – be sure you account for income and business owner draws, so you get as much money as you can if you become disabled). Insurance is a good idea, just be aware that you may be in for a rude awakening.

  • http://www.sagewing.com Sagewing

    A ROTH IRA is post tax, so you don’t get to deduct your contributions from your income. You still get tax-free growth, but a SEP IRA offers deductible contributions and usually much higher limits.

    Max a SEP IRA (or an individual 401k or some tax-advantaged account) before you fund your ROTH!

  • http://www.brightbridge.net allspiritseve

    Sure, you pay taxes on your contributions to a Roth IRA, but you don’t pay taxes on the interest you make. If you’re investing in the long term, that is much more beneficial than writing off your initial contributions. Don’t overlook the power of compound interest.

  • http://www.sagewing.com Sagewing

    With a ROTH, the contribution is post-tax and growth is tax-free.

    With a 401k/SEP, you save money by deducting the initial contribution AND the growth is tax-free.

    If you are really interested in leveraging the power of compound interest, the immediate return (in the form of lower taxes) of a 401/SEP can be invested into the ROTH and you come out way ahead.

  • http://www.brightbridge.net allspiritseve

    401K and SEP IRA growth is not tax free: “Withdrawals after age 59 1/2 are taxed as ordinary income.” -SEPIRA.com

    Also, I’d like to see some numbers on your second statement “you come out way ahead”. Sure, you do have more to invest initially, but everything you withdraw gets taxed in retirement. Not to mention you may be in a higher tax bracket at that point.

  • http://www.sagewing.com Sagewing

    Well, the growth is tax-free until you withdraw it. The traditional vs. ROTH debate is an old one and boils down to this: if you think you can predict where tax rates will go in the future AND what your personal tax rate will be at retirement then the decision is a snap. Most people can’t do that.

    The ideal approach is to do a bit of tax diversification and invest in both a Roth a traditional IRA, or similar. However, them majority of tax payers will stop working around the same time they are subject to RMD, therefore they will be paying a lower tax rate during retirement then they did during their accumulation phase. Therefore, goes the common logic, the initial deduction combined with the investment opportunity that comes from that additional cash will outweigh the fact that taxes need to paid (hopefully at that lower rate) in the future.

    Obviously this may not be true, but there is an abundance of ‘ROTH vs. Traditional’ calculators on the web and lots of people offering free Internet advice on this topic.

  • http://www.sagewing.com Sagewing

    IRA’s suck. You’d get better returns investing a fixed amount at regular times (each week) in a big name stock.

    An important thing to consider: Take 10% of everything you make, and automatically put it in a savings account. Make it like an expense that gets take away before you’r tempted to spend it, even for food. That means every thing you invoive for, take 10% of the payment recvd and put it away for savings. Otherwise you wind up working your ass off and then realize you don’t have anything to show for it.

    Also when you contract with a financial advisor, be prepared to spend a lot of money on insurance, i.e. disability income protection (if you become disabled the insurance will pay 70% of your previous income – be sure you account for income and business owner draws, so you get as much money as you can if you become disabled). Insurance is a good idea, just be aware that you may be in for a rude awakening.

    What a strange post. Certainly you are aware that you can invest in individual stocks in an IRA, right? You can even own real estate in an IRA. An IRA is an account type, not an investment type.

    And, you must realize that right now there are hardly any savings accounts that pay much interest at all. Investing 10% of your income in a savings account is likely to make you lose actual spending power to inflation. At the very least consider bonds, MMA, or CD’s rather than a savings account.

    And certainly you know that a qualified, no-fee financial adviser is unlikely to push you into spending ‘a lot of money’ on insurance that will bring a rude awakening. On the contrary, a good adviser is more likely to help you choose the level of insurance (life, disability, LTC, etc.) that you actually need based on your assets and risk.

    But the most amazing thing about your post it that you recommend investing in a ‘big name stock’. Would AIG count? How about Enron? Ford? Citibank? If you are going to be a stock picker, the odds are against you but using the ‘only invest in big name stocks’ rule doesn’t seem like much of a system.

  • thachi

    I guess I’m still too young to think about this question but for my parents ,they are worrying about this. My father wants to stay at work as long as he could do it. I kind of think it is hard for him but this is what he wants to do. so … I have been supportive.

  • http://www.brightbridge.net allspiritseve

    @thachi what makes you think you’re too young? Start socking away 10% of your income now, you won’t regret it later. That’s a good habit to build. If you want to retire conmfortably, consider mutual funds or index funds. Compound interest favors the young. For example: investing $2,000 as an 18 year old, assuming a 10% average return, ends up being somewhere near $1,000,000 by retirement age. If you want to read more about investing while you’re young, Ramit Sethi at iwillteachyoutoberich.com and JD Roth at getrichslowly.org have tons of good info.

  • Fernan

    Read: Your Money or Your Life: http://tinyurl.com/yabptz2

  • Ocardowan

    If you have to do it, you might as well do it right.,