According to a survey by Kauffman Index of Entrepreneurial Activity, there were about 565,000 businesses being created every month in the US in 2010. This figure continues to increase as more people opt for self-employment. While this is great news for the economy, there’s an important factor that many of these entrepreneurs fail to take note of: Saving for Retirement.
According to some experts, this lack of saving amongst the self-employed may be attributed to the fact that many need to have flexible finances in order to cater for any losses or immediate needs in their businesses.
Saving for retirement, however, should not be ignored.
How much should you save?
If you’re self-employed and would like to start saving for retirement, consider setting aside at least two-thirds of your income. However, this is not a figure set in stone.
The best rule to follow is to set aside some percentage of your income that you can afford each month, and to start as soon as possible. Starting earlier will ensure that your savings grow over a longer time. If you start saving $100 a month at the age of 25 at an interest rate of 6%, your retirement fund will have grown to about $190,000 by the time you’re ready to retire.
How should you get started?
There are various options to retirement saving for the self-employed. The differences lie in the charges, flexibility in the monthly contributions made and investment choices available. There are three main options:
- SEP-IRA : This is a simplified plan. Self-employed individuals can contribute up to 25% of their income. This option is highly flexible. You can increase your contribution when your income increases and therefore reduce what you pay as tax. You can also reduce your contribution in a bad year.
- Solo 401 (k) : This is a good choice for those who are able to set aside a larger portion of their earnings. You can save as much as $16,500 under this plan.
- Simple IRA : This is a savings incentive that is designed specifically to encourage small business owners and the self-employed to save for retirement. It is designed to allow small businesses to provide pension benefits for their employees who make more than $5,000.
If you’re starting from scratch, it would be advisable to get some expert advice. Talk to a financial planning expert or a retirement planning firm for guidance on the best retirement plan for you. These experts will help you evaluate your current financial situation and goals for the future. They will help you determine the best type of pension.
What about old pensions?
Some self-employed people were part of an employers’ pension before venturing into business. If you already had a pension then you ought to consider leaving it depending on the terms. Keep in mind that there are high penalties for pension transfers.