Everyone should be planning for retirement, and the earlier you start saving for your golden years, the more comfortable you’ll be when you choose to leave the world of work.
For people with full time jobs for an employer, the obvious option is paying into a pension plan which is provided by the business itself, so in a sense this is basically a no-brainer.
Of course, if you’re an entrepreneur, then you might not have the same job stability or employment history to rely on this approach. So, what kinds of retirement saving solutions will work best for the people who build businesses?
Let’s go over the most common options.
Setting Up an IRA
Putting money into an individual retirement account (IRA) is an excellent option for entrepreneurs who want to plan for their future without taking a hit from taxation on their savings along the way.
There are all sorts of IRA products out there, with traditional packages allowing you to deduct your contributions from your tax bill so long as you qualify. Roth IRAs are another popular choice, and don’t have the same limits as traditional equivalents, but do prevent you from deducting contributions.
Regardless of the type of IRA solution you pick, it’s important to know how much you can contribute each year, which is where an online IRA calculator comes into play. Aspects like your age, your employment status and whether or not you are married are all taken into account to determine this.
IRAs are often harnessed by employer pension providers and private firms, although they are also open to self-employed individuals, which is often the status that an entrepreneur will occupy until they have got a business up and running.
In terms of actually acquiring an IRA, there are ample options out there. Banks and other established financial institutions offer them, along with a whole host of other providers and brands.
This can make choosing the right package confusing, which is why it makes sense to work with a financial advisor as well as an accountant so that you can pick an appropriate product and maximize your contributions while staying tax efficient.
The final point to make about IRAs is that because they are intended to incentivize retirement saving activities, there are also penalties that apply if you choose to withdraw cash early.
Taking funds out prior to reaching 60 years of age is usually dissuaded in this way, and the charge for doing so could be around a tenth of the total pot. Thus it makes sense to also have a separate savings pot which can be accessed for emergencies as well.
Are you an entrepreneur who wants to save for your retirement?
Using an Individual 401k
Also known as a solo 401k, this retirement savings plan is similar to an IRA, but has specific benefits for self-employed people and small business owners. If you are an entrepreneur and you only have yourself as the employee of your fledgling firm, then it could tick a lot of boxes.
Another benefit of an individual 401k plan is that it doesn’t have the same limits of an IRA in terms of how much you can contribute from year to year. This is why it suits people with a higher income, as contributions are capped at around $60,000 at the moment, and will continue to rise year on year, taking into account things like inflation.
Obviously if you decide to employ other people within your organization, it will become necessary to switch to a standard 401k plan, and make contributions both as the employer and the employee to your own pot. But for solo entrepreneurs, the simplicity and flexibility of an individual 401k makes it a great choice right out of the gate.
Making Personal Investments
The ideal scenario for any entrepreneur is to fund a company which grows and grows, and eventually gives them ownership of an asset which can be sold on, creating a cushion of cash which could be more than enough to fund a lifestyle of luxury for the rest of your days.
While it’s nice to dream big, you also have to be realistic. Lots of startups fail, and even if you make all the right moves, outside forces can scupper your best laid plans. That’s why the aforementioned retirement saving options are still a tried and tested method for employees and business owners alike.
Investing in your own right is also a good idea, for a couple of reasons. First, you might appreciate the level of control you can exert over your portfolio, rather than leaving this to a third party.
Second, you don’t have to worry about the cash being locked away with the promise of a potential penalty applying if you want to take it out and use it to cover immediate costs you are faced with right now.
Of course, a lot of people don’t have time to play the markets and do the necessary research to pick stocks and shares themselves. Outsourcing this to a broker or using an investment platform which automates everything for you, can help if this is your preference.
Investing in property is also still a popular and comparatively safe way to both generate passive income, and having a portfolio of domestic or commercial premises can be a retirement plan in its own right.
There are of course costs to bear and taxes to pay if you decide that becoming a landlord on the side to supplement your entrepreneurial efforts is sensible. But even so, if this is already an area of interest for you then it could be more attractive than other types of investment.
Finally, it may be a good move to reinvest in your business where possible, especially if rapid growth is your aim. The sturdier your startup becomes, the more potent it will be as a source of income for you, and this in turn will perpetuate your ability to save more for retirement.
As such, you need to look at investment options from all angles, and follow the old adage of needing to spend money to make money, rather than getting too caught up in the race to save as much as possible, which could hamper you rather than help you in the long run.
As an entrepreneur, now is the time to save for your retirement.
Setting Savings Goals
The last thing worth discussing is how entrepreneurs can achieve the kinds of retirement savings that are accessible to those employed within more traditional business structures.
The percentage-based approach to picking a retirement savings goal is easiest to follow but comes with its own complications from a purely financial perspective.
Some experts recommend saving as much as 25 percent of your income to bolster your retirement pot each year, which is obviously a significant slice to contribute. If you do go all-in with a view to following the FIRE method, potentially seeking early retirement, then your sights will have to be set even higher.
It can be a daunting prospect to put so much cash aside, especially with the uncertainty that the future holds. One sensible option for approaching this is to start small and work your way up to saving a larger amount of your income over the course of a few years.
Rather than going right in at the top end, this will let you adjust to how this impacts your disposable income and your quality of life and make decisions that are best for your circumstances right now, not just for what they might be in decades to come.
For entrepreneurs, the other consideration in this context is that your income may fluctuate significantly from year to year. You might choose not to take a salary at all when getting your business off the ground, for example, which will obviously limit your ability to bolster your pension pot for a time.
It’s a case of hoping for the best but planning for the worst and being frugal where it makes sense while also making sure that you aren’t sacrificing too much in the present, because it’s still important to enjoy life when you’re young.
Closing Thoughts About How Entrepreneurs Can Save For Retirement
Ultimately you need to follow your own path; don’t just stick to the most popular route simply because everyone else is doing it, or because it feels like a safe bet.
As mentioned earlier, getting expert financial advice that is tailored to your needs will streamline decision-making in this regard. Another factor to weigh up here is how your retirement plans will impact the other people in your life.
How you handle things at this point will influence what kind of lifestyle you and your family will be able to enjoy when you retire, as well as what you are able to leave behind for the next generation, if this is one of your ambitions.
There is no right answer for everyone, but there is also no way to get around the fact that saving for retirement is essential. The most important advice is to start the process sooner rather than later, as you’ll reap the rewards further down the line.
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