How to Prepare for Retirement When You Work For Yourself

How to Prepare for Retirement When You Work For Yourself

Wednesday, November 20, 2019

The growth of the gig economy and the lack of stable employment opportunities in many sectors has led many people to look at the options that are available for working for themselves. Some of these folks have an entrepreneurial spirit — others are forced into the arena of self-employment because of circumstances largely beyond their control. Regardless of the reasons why someone makes the decision to work for his- or herself, there is the looming question of how to prepare for retirement without the benefit of an employer-sponsored retirement plan. Here are some steps that can work.

Set Goals

If you’re looking to retire at some point, it’s a good idea to start planning for that eventuality as soon as possible. This will require the setting of short-term and long-term goals. The long-term goal will obviously include retirement. The short-term goals are the steps that you’ll attempt to take as you decide how to plan for retirement — those goals involve saving up six months of expenses as an emergency fund before making any other financial decisions.

The reason for this short-term goal is the fact that self-employed folks tend to have irregular income. Some months will have little income, while others will bring in an influx of cash. Having some money set aside for the lean period will help you maintain your efforts toward retirement. It will also alleviate much of the concern that comes from a lack of adequate cash flow. After getting a few months of expenses saved, you’ll be able to start saving toward your retirement with less stress.

Develop A Succession Plan

Depending upon the size of your business, you might need to have a succession plan in place to ensure that you’re able to leave the business on your own terms when you reach the point that you want to retire. If you’re a self-employed freelancer, many of these concerns will not apply. On the other hand, if you have employees, you’ll want to ensure that they are taken care of. You’ll want to have an attorney and a CPA in place to handle some of the stickier legal and financial issues that might arise from the transition. Additionally, you might want to have a plan in place to market the business to an outside buyer if one has not already been identified. The sale of your business might allow you to fund your retirement outright. If you’re unlikely to make a massive amount of money on the sale of your business, you’ll have to figure out how to fund your retirement in other ways.

Diversify Your Retirement Fund

It’s unlikely to have 100 percent certainty that your business will sell for a nice price when it’s finally time to retire. Therefore, you’ll need to save for retirement without a traditional work-based retirement plan. If you didn’t already know, Uncle Sam provides options for self-employed people who are wondering how to plan for retirement. There are traditional and Roth IRA accounts that are available to most Americans. These accounts allow investors to save for retirement in a tax-advantaged manner. The upper limit that people can save in an IRA is $6,000 per year — and those who are 50 or older can add an additional $1,000 to their account each year.

Additionally, even if you don’t have access to a regular 401k plan as a self-employed remote worker or entrepreneur, you can save in a Solo 401k, which is much like the ordinary work-based retirement savings plan. The contribution limit for 2019 is $19,000 for most people. Those who have reached 50 years of age can add an additional $6,000 to the account each year for a total of $25,000. Another option that allows for higher contribution limits is the SEP-IRA, which allows self-employed individuals to save up to $56,000 as long as this amount is not more than 25 percent of their total net income. You’ll also want to save in index funds or ETFs that include a healthy level of diversification in stocks and bonds. A life-cycle or target-date fund is a great way to achieve instant diversification.

Getting set up with a retirement plan as a self-employed individual is not terribly difficult. However, it is necessary if you’re looking to enjoy a comfortable retirement. Check with The Forum for additional resources for getting set up with the information you need to set up an effective plan for retirement as an entrepreneur.

How to Prepare for Retirement When You Work For Yourself