I have a confession to make. Last year we did very little in terms of saving for retirement. I’ve spoken on numerous occasions about retirement planning tips, but fell short last year.
When I look back at our retirement saving efforts over the last year, there is one area in particular that I have regrets about (other than not setting aside more, of course ). We saved money throughout the year and put it in a money market account, but we were not actively putting it in the stock market like we should. I’m sure there are multiple reasons behind it, but ultimately it all points back to fear in relation to being self-employed and what business would look like six months down the road. We needed to keep our money liquid (or at least it felt that way) and looking back, I realize that played into our decisions and actions regarding retirement saving. That said, I’m committed to doing things differently now that we’re in 2014 and taking action on some of the retirement planning tips I’ve promoted for some time.
My Retirement Planning Tip – Don’t Wait!
Saving for retirement, and really investing altogether really does come down to time, which is why I think it’s so important to start investing with little money, regardless of the amount as you do not want to allow time to pass you by out of fear that what you’re investing too little.
This is huge when you’re self-employed. Not only are you missing out on a possible 401k match through a traditional employer but your time is also tied up dealing with other things related to running your own business. That latter point is what I tripped up on this past year and what I’m going to be avoiding this year with our retirement planning.
Going back to the issue of losing out on the 401k, being self-employed also means that you need to be saving more money for retirement, not less. No brainer I know, but still an incredibly important retirement tip not to overlook. The simple fact is that the employer match is one of the best benefits to be had and you’re missing out on that when you’re self-employed. In light of that, you need to be double timing your retirement saving so you can make significant progress and putting money into a savings account throughout the year is simply not enough. If you’re doing that to build up your emergency fund that is one thing, but in terms of retirement planning you’re essentially losing money due to inflation.
What are Your Retirement Options if You’re Self-Employed
Since you don’t have a nice 401k to opt in to when you’re self-employed that means you need to be looking for other retirement planning options. There are a few main options to consider, and if you’re looking for specific retirement planning tips I encourage you to speak with a tax advisor as I’m not one and you want professional advice when determining what is right for your specific situation. That said, much of the information I’ve included below is from the IRS website.
SEP IRA: The SEP IRA is likely the most popular option that many self-employed individuals look at when saving for retirement. This is the option my wife and I went with and I’ll get into a little more later as to why. The SEP allows you to contribute up to 25% of your net earnings – or up to $51,000 for 2013 (and $52,000 for 2014). The SEP is good if you’re a one person business, or in our case two person business.
A SEP operates like a Traditional IRA in that the contributions are tax deductible in the year you make them. The benefit of SEPs is the amount you can contribute and flexibility you have with them, but the downside is if you add employees in the future as you’re legally required to make the same contribution for all your non-contract workers.
Solo 401k: The Solo 401k is also another solid retirement planning option to look at if you’re self-employed. You can contribute up to $17,500 for 2013 and 2014 (plus a catch up of $5,500 if you’re over 50). In addition to this contribution you can also put in an additional 25% of your net earnings – with it being the same amounts as those for the SEP.
The main benefit of the Solo 401k is that you can contribute even more than the SEP and also have the ability to take out a loan on it if you need, though I’d try to avoid that latter option. The drawbacks are that many online brokerages charge some sort of set-up fee in the realm of $100-$250 annually and only you and your spouse can contribute.
SIMPLE IRA: The final main retirement option for self-employed individuals is the SIMPLE IRA. This retirement option is specifically for business that have a couple of employees under their umbrella. You can contribute up to $12,000 for 2013 and 2014 (and an additional $2,500 if you’re 50 or over).
The benefits of the SIMPLE is they’re fairly easy to set up and they are very flexible. The main drawback is that accounts must be opened by October 1 of each year as well as a lower contribution limit than that of the SEP IRA and Solo 401k.
So, as you can see there are several options to look at when you’re saving for retirement while being self-employed, with the SEP and Solo 401k being the most common. That said, there are other options out there, but these are generally the most common retirement saving vehicles for someone that is self-employed.
What We Chose
Now that I’ve bored you to death with my retirement planning tip I’ll let you in on what we went for. Mrs. Frugal Rules and I both opened SEP IRA accounts with my favorite brokerage Scottrade as it really came down to the SEP IRA vs. Solo 401k for us. We opened our respective SEPs at the end of the 2013 year and funded both accounts as well as funding our Roth IRA accounts. We do a majority of our investing with Scottrade as we like their service, their commission is very reasonable and they have a local branch office that we can visit any time we need to speak with someone in person.
That said, I don’t want to gloss over the importance of retirement planning when you’re self-employed. It is incredibly important, as you’re losing out on any match, and must be taken seriously. I’ve spoken with self-employed individuals in the past who did not take it seriously and, as a result, were in their 50s and 60s with nothing to speak of in terms of retirement investments.
What I’ve committed myself to doing this year and beyond is to view our retirement planning as a monthly bill to our future selves. We’ve set up direct deposits into our respective accounts on a monthly basis and will be investing those deposits in the market, largely in low cost index funds. Assuming we have better months down the road, we will also set aside overages in our SEP IRAs to maximize what we’re putting into the market.
As we were already putting the money aside throughout the year in our savings account this should not be a real sacrifice, but I find it’s the mental aspect of making our money grow rather than just sit that’s important to maintain.
Like I said in the beginning, and have said prior, time is incredibly important when it comes to investing in the stock market and exponentially more so when you’re saving for retirement. If you’re self-employed, please don’t make the mistake of waiting, but start now with whatever you have.
Additionally, if you’re seeking out help with retirement planning tips specific to your business and tax situation please find a qualified tax professional to help you wade through the deep and complex waters of self-employment and saving for retirement.
What is something you’re going to do different this year when it comes to saving for retirement? Do you view investing in the stock market as a bill to yourself?
Photo courtesy of: StockMonkeys.com