By Jessica Larson, SolopreneurJournal.com
Retirement is one of those things you don’t have to worry as much about if you’re working for someone else. You can sign up for a 401(k) plan, and then (almost) forget about it.
Well, you’ll probably be more actively involved than that. The point is, though, that a lot of the heavy lifting is done for you, and your options are clearly defined. Plus, you can usually take advantage of a matching contribution from your employer.
When you’re self-employed? Not so much.
It’s up to you to explore your options, know the pros and cons of each and how it would affect your situation, create a retirement budget, and so on. However, that can feel overwhelming, so here are a few ideas to get you started.
Research Retirement Accounts
First, it’s worth exploring which retirement plan fits best with your goals, both personally and for your small business:
You can still have a 401(k), even if you’re not working for someone else. The solo 401(k) works similarly, except that you’re both the employer and the employee.
As an employee, you can contribute up to $58,000 (and up to $6,500 more if you’re over 50); as an employer, you’re eligible to contribute 25% of your net income as an entrepreneur. You take withdrawals anytime after you turn 59½ and pay your taxes then.
You can contribute up to $6,000 a year, or $7,000 if you’re 50 or over (as of 2021). You can take a tax deduction on your contribution, but you’ll have to pay taxes when you withdraw the money in retirement.
Unlike a traditional IRA, you don’t get a tax deduction on your contributions, but you won’t have to pay taxes when you pull money out during retirement. In the meantime, if you need the money you’ve contributed, you can pull it out at any time without penalty.
This plan operates similarly to a solo 401(k), but with less paperwork and fewer IRS reporting requirements. The downside is that if you have any employees, then you’ll have to contribute the same percentage to their plans as you do to your own.
If you’ve got a retirement account that’s earning interest, then that’s a good thing. However, you don’t want to neutralize it by paying interest on a bunch of debt, especially if the interest you’re paying is more than what you’re earning. That’s a net loss.
In deciding between putting more money into your retirement account and paying off debt, consider your personal situation and which makes more sense. Take interest rates and tax consequences into account too. If you’ve got high-interest debts, it’s a good idea to pay those off so interest doesn’t keep accumulating.
Invest in Your Home
Equity in your home can be a great source of retirement income. Many empty nesters take the opportunity to sell the family home and move into something smaller (and less expensive). If you plan to keep working after you retire, like many entrepreneurs, then having less home to clean and maintain may be an option worth exploring.
You’ll have to maintain your property to get the most out of it, though, and you can tap into your home equity for major upgrades along the way. For instance, window replacement costs for a single-story home can be as much as $8,500. While you could tap into your Roth IRA for expenses like these without penalty, you’ll need to be sure you can save more for retirement that way rather than by leaving the money where it is.
Maintain Your Credit
When you think about building your financial resources for retirement, you shouldn’t overlook building credit. Your self-employed status will make it even more important to maintain your credit. Mortgage lenders, for example, require more from self-employed business owners (two years’ worth of tax records) than those who work for others.
Good credit will be more important than ever once you retire because you won’t have a job to cite as a source of income on any loan applications. Therefore, it’s vital to know what you must do to build credit now, so it will be there in the future.
Consider Life Insurance
Whole life insurance can be a tool to build a retirement portfolio if you play your cards right. You get a place to grow your money, tax-free, and at an interest rate guaranteed by the policy seller.
If you need to, you can tap into the cash value of your life insurance by taking out a loan. You won’t have to pay taxes on the money you borrow, but it will trim the value of any death benefits that your heirs will get.
This kind of approach won’t work as well when you’re older, though; health issues can drive up costs or make you ineligible to purchase a policy. Therefore, if you choose this option, then it’s a good idea to do this before you’re 45.
If you’ve decided to go into business for yourself, then the need for retirement planning doesn’t go away. It becomes all the more important. Fortunately, there are strategies available that can help you plan effectively for a retirement that fits your goals and personal situation. This list should give you a head start on where to look.