If you're self-employed, you probably have a good handle on how to make a living, but does that include how you will live after you retire from your business? No matter how much you enjoy your work, there's likely a part of you that looks forward to retirement, or at least wonders what it will be like when the time comes. There's a lot to consider, and the more thought you put into it, the better you'll fare as the big day approaches.
Entrepreneurs are risk-takers by nature, but failing to plan for your retirement is a risk you shouldn’t take. Consider these tips on planning for your retirement.
1. Start today
Even if you've just begun running your business, you'll be doing yourself a great service by planning for the future so that when the time comes, you have not only the means to retire, but an exit strategy and an idea of how you want to spend your post-work life.
2. Develop a long-term strategy
Don't just have a vague plan for your later years. Have a detailed strategy. Really think through what your path will look like from the present through your retirement.
"Develop a written retirement strategy that includes a budget, estimates retirement savings and income needs and addresses a broad range of other factors (e.g., government benefits, investment returns, healthcare expenses, long-term care needs, and paying off any debt)," says John Manganaro at Plan Adviser. "It should also include an exit strategy for one’s business and contingency plans if forced into retirement sooner than planned."*
3. Pay yourself a regular salary
Your business income may vary from month to month, especially if you deal with seasonal products or services. It can be tempting to take more out of your business during busy times and spend it on things you don’t necessarily need. Then, some belt-tightening is in order when business slows down. This makes it difficult to do any kind of planning or budgeting and can hurt you in the long run.
4. Live by a budget
Once you know how much you’ll be withdrawing from your business as a monthly salary, you can set up a budget and stick to it. Add up how much you need month-to-month or week-to-week. An easy way to start is to review your bank statements and credit card receipts. Figure out how much you have that won't be going to regular expenses, give yourself a certain amount to spend, and save the rest. As long as you stick to your budget consistently, the savings will add up.
5. Add to savings whenever possible
Beyond saving what you can week-to-week as you stick to your budget, add any extra money you receive to your savings account. This could include tax refunds, any extra gig work, an inheritance, etc. Anything you can save now can help you be prepared for retirement later. With each new year, take the opportunity to examine how much you were able to save from the past year, and make a goal to increase that amount in the coming year. Map out how you expect to achieve that and stick to a plan.
6. Set up an IRA or other retirement account
If you don't have a retirement account set up, do so as soon as possible. The sooner you start one, the sooner it can start earning money for you. Even if you intend to live modestly, setting up the right retirement account is vital to your future. Think of your retirement fund as a security blanket that will be there when you truly need it, and keep adding to it as time goes by for your best chance at a happy retirement.
Options for the self-employed include a traditional or Roth IRA, Solo 401(k), SEP IRA, Simple IRA, or Defined-Benefit plan. Explore your options to see which makes the most sense for your given situation, business size, and expectations. If you have a 401(k) that was set up with a previous employer, ask about having this moved into your new account.
7. Get professional help
You’re an expert about your industry or profession and about the best way to run your company, but that doesn’t mean you know everything about the best financial plan for your future. Chances are, retirement planning isn't your area of expertise, and that's okay. It's not the easiest subject to grasp when it comes to the intricacies of different types of plans and investment strategies.
Ask your bank if they have professionals who specialize in helping business owners with financial planning. Developing a long-term relationship with a banking professional can be a big help when you have questions or need guidance.
*https://www.planadviser.com/10-retirement-planning-tips-self-employed/
