Your Guide to Retirement as a Self-Employed Entrepreneur

Retirement planning is an important part of our lives. Usually, companies offer various plans to their employees, but if you are a self-employed entrepreneur, you will have to work out a retirement strategy yourself.

But where to start? And what should you consider when you are planning your retirement? Find out all you need to know in our comprehensive guide.

From Successful Entrepreneur to Happy Retiree

Setting up your own business is a bold but rewarding step. Owning a small business can give you independence, allowing you to manage your life as you choose. Besides, if you choose a business model wisely, you can generate enough income to live comfortably, and you’ll have sufficient funds left to set aside for retirement. However, being an entrepreneur has its own challenges that can influence your savings plan.

More often than not, small business ventures don’t bring in steady income; instead, the latter fluctuates depending on the market conditions. That means you might need to adjust your monthly payments according to your cash flow.

The first step for creating your strategy is to determine at what age you want to retire and how you envision your life as a retiree. Do you want to live simply and quietly, or do you prefer a more active lifestyle? If you like travelling or have other expensive hobbies, you should also plan for that.

It might mean higher monthly payments to ensure that your retirement fund will be sufficiently large to support you. Healthcare is another aspect to consider.

Moreover, you should consider your current financial situation and determine what your business is worth. Do you already have retirement savings or investments, or are you starting now? By considering all of this, you can lay out the plan of how much you can set aside for retirement each month.

However, if your income fluctuates because of season changes or other specific reasons, you should build your plan accordingly. And don’t forget to make allowances for unplanned expenses or complications. After all, owning a business is its own kind of financial risk; sometimes, you can’t avoid losing money and have to recoup.

How To Build An Emergency Fund

One of the benefits of owning a business is that you can channel your income into various other endeavours. Diversification is a great way to increase your income and build an emergency fund for unplanned expenses. You can also add the overflow cash to your retirement fund.

Financial markets offer so many opportunities for profiting: you can try investing money in the stock market or real estate. The end goal is to safeguard your business from market volatility.

A lot depends on your business plan as well. If it’s sound and well-thought-out, your company will thrive, and you will generate more income. However, considering that you have to make monthly payments for your retirement fund, you should focus on additional income for building your emergency savings.

Plan the Business Exit Strategy

If you plan to remain active in your business even after retirement, then you have to plan your strategy accordingly. Not everyone chooses a full exit from their business. Some people prefer to remain active in the business world and maintain control over their enterprises, especially if they have employed people and feel responsible for their well-being.

Starting a business gives entrepreneurs a unique opportunity for partial retirement and continued income. But if you prefer a full exit, that’s easy to do as well. You can just sell your company or pass it on to the next generation.

However, the business exit strategy significantly impacts the retirement plan. So, you should make this decision before choosing the latter.

The Best Retirement Plans Out There: Which One To Choose?

As we have mentioned, there are many retirement plans, all with unique benefits and drawbacks. The most popular ones are IRAs, typically offered by financial institutions, and 401(k)s, which employers provide. Simplified Employee Pension (SEP-IRA) plans are also issued by financial institutions and are designed for small businesses or self-employed individuals. On the other hand, Cash Balance plans are defined benefit plans provided by employers, often used by businesses to offer retirement benefits that are easier for employees to understand.

Individual Retirement Accounts (IRAs)

These are the most common from our list. You can open your personal savings account and get various tax benefits. Moreover, this plan offers investment options, which is a great bonus.

There are three main types of IRAs: Traditional IRA, Roth IRA, and Rollover IRA, and each comes with different benefits. The first option, IRAs, enables you to make deductions on your tax return. This could potentially result in paying lower taxes after retirement.

The second one allows you to pay with after-tax money; thus, your savings will grow tax-free, and you can make the same kind of withdrawals in the future, but only if you adhere to some conditions.

The third one involves moving money from a qualified retirement plan and adding it to a traditional IRA account. For example, you can move assets from a 401(k) plan into this one. The latter’s benefit is increased growth of your savings.

401(k)

This retirement savings plan offers people various tax advantages. However, it is an employer-provided plan with a defined contribution. So, if you are a self-employed entrepreneur, you can register both as an employer and employee to make payments.

Simplified Employee Pension (SEP)

This plan makes it easy for employers to pay for their own and employees’ retirement. You have to set up separate plans for each staff member, though, and deliver money either into an Individual Retirement Account or Annuity (IRA) account.

Cash Balance Plan

This one is a pre-defined benefit plan; you will get benefits based on your cash balance plan. This one is more acceptable for some business owners, but it depends on the type of your enterprise and various other factors.

Conclusion

Overall, you have to consider many factors while planning your retirement strategy. One of them is determining retirement income and leveraging tax deductions when possible. Try to get as many tax advantages as possible. You can seek advice from financial advisors if you feel as if you have an inadequate understanding of the subject.

And don’t forget that retirement planning isn’t a short-term endeavour but a lifetime task. You should always consider it and adjust your strategy or payments according to your current situation.