Are you self-employed? In many ways, you may feel like you’re living the dream. You get to set your own schedule, make your own rules and make a living by doing what you love. Self-employment can bring challenges and complications, but for many people, the benefits far outweigh the costs.
While self-employment may be fulfilling, it can present difficulties when it comes to saving for retirement. Traditional employees are able to participate in their employer’s 401(k) plan or pension. They may even receive a matching retirement contribution from their employer. Self-employed individuals don’t have that option.
You may believe that you can simply delay retirement as long as you want. Maybe you don’t have any desire to retire. However, chances are good that you will have to stop working at some point. You could become physically unable to work, or you may simply decide that you want to pursue other activities.
The good news is you can plan ahead by taking action today. Below are a few tips to help you prepare for retirement:
Automate your savings.
When you’re self-employed, you always face decisions about how to allocate your resources. You have normal bills and expenses you need to pay, but you also may wish to invest in your business.
It can be easy to choose your business or current expenses over saving for retirement. You may feel that other goals are more urgent than retirement. Thus, given the choice, you allocate money to those other priorities. The problem is that if you consistently make this choice, you end up never putting money away for the future.
You can avoid this risk by putting your retirement savings on autopilot. Set up automatic transfers to your retirement accounts so you don’t have the option of using the money for other purposes. That could help you accumulate retirement assets quickly.
Consider using a SEP IRA.
Many people use qualified accounts like 401(k) plans and individual retirement accounts (IRAs) to save for retirement. These accounts are popular savings tools, primarily because of their unique tax treatment. Most of these plans are tax-deferred, which means you don’t pay taxes on your investment growth as long as the funds stay in the account. Some also offer current tax deductions.
However, as a self-employed individual, you have an option that traditional workers don’t have. It’s called a SEP IRA, and it operates much like a traditional IRA. You can deduct your contributions, and your funds grow tax-deferred. Your distributions are taxable, however, and you could face a penalty if you take a withdrawal before age 59½.
The key difference between the SEP IRA and traditional IRA is the amount you can contribute. In 2018 you can contribute 20 percent of your net income, up to $55,000, to a SEP IRA.1 This entire amount is tax-deductible. Keep in mind, though, that if you have employees, you are required to make contributions on their behalf, too.
Protect your ability to work.
Finally, as a self-employed individual, it’s important that you protect your most important asset - your ability to work and create income. Disability is a very real threat, and it’s a dangerous risk to your current standard of living and your retirement. The Council for Disability Awareness estimates that 1 in 4 adults will become disabled at some point in their lifetime.2
One effective way to minimize this risk is with disability insurance. These insurance policies replace your income if you become injured, ill, or otherwise physically unable to work. If you suffer an injury or illness that prevents you from working, the disability policy pays you some or all of your lost wages. You can use this money to maintain your lifestyle, pay medical bills and even fund your retirement.
Ready to plan your retirement strategy? Let’s talk about it. Contact us today at Financial Solutions Group. We can help you analyze your needs and implement a plan. Let’s connect soon and start the conversation.
Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency.
17700 - 2018/5/30