Saving up for retirement as an employed individual can be a no-brainer. You can simply sign up under your employer’s plan and you can be set for life if you plan to stay in your company long-term. However, small business owners and self-employed individuals may have a different story. Aside from needing the discipline to set aside their own contributions, they may also encounter problems in planning for retirement savings such as:
- Not knowing the best retirement plan for their employment status
- Instances of fluctuating earnings, causing retirement savings to be set aside
- Prioritizing business or self-employment pursuits which also causes problems in retirement savings
If these situations ring true to you as a small business owner or a self-employed individual, this article is meant to pinpoint the specific hurdles and potential solutions to help you save for retirement. Derby Advisors provides this concise guide to help you stay on top of retirement savings.
Derby Advisors Explains Why Your Retirement Savings Are Falling Short as a Self Employed Individual
Problem 1: Your freedom costs you your potential earnings.
We are pretty sure you have heard this familiar quote — “With great power comes great responsibility”. This is true for self-employed individuals. Since you have the freedom to create your own earnings, it also comes with a potential pitfall. You may tend to slack off and only make enough money to get through your daily expenses, leaving nothing for your retirement savings.
As a small business owner or a self-employed person, you are only accountable to yourself. Although you have the capacity to scale up your earnings, the problem for undisciplined people lies there — you have nobody to answer to. Thus, it can be difficult to stay motivated when no one is pressuring you to get the job done.
Solution: Derby Advisors suggest creating SMART financial goals. What does SMART stand for?
- Specific: How much money will you be saving?
- Measurable: Don’t say just ‘a lot’; you must set a goal with an actual numeric value.
- Attainable: Is this goal achievable within your means?
- Realistic: Is this goal possible to achieve within your time frame?
- Time-Bound: Set a specific timeline to achieve this financial goal.
By having SMART financial goals, you can improve the chances of saving for your retirement.
Problem 2: Your earnings are based on market demand.
Another reason why you may be falling short on your retirement savings plan is the ever-changing demands of the market. Unlike being employed where you get paid by the hour, your income depends on the performance of your business. This is a problem when you don’t have enough market demand for your products or services.
Solution: If this is a problem in your life as a self-employed individual, it is advisable to keep your earnings afloat with the best practices:
- Perform market research: It is important to know who your target audience is and what their needs are. This can help you gain a competitive advantage towards other sellers or service providers.
- Write a business plan: If you fail to plan, you plan to fail. Having a business plan can help you track the progress of your objectives as a self-employed individual.
- Look for franchising opportunities: Franchises are businesses which are tried and tested. It is possible to increase your earnings by investing in a good franchise. Just make sure to do your research first.
- Have a marketing strategy: Sometimes, your offers may be stellar, but you lack the strategies to get your business ‘out there’. Having a solid marketing strategy can help boost your earnings.
Keeping these tips in mind can help you have more income, thus allowing you to put aside more for your retirement plan.
Problem 3: You have other priorities when setting aside your income.
This is a common problem not just for the self-employed, but also for those who are earning a fixed income. Other priorities can get in the way of having some income set aside for your retirement. Most of the time, it’s the lack of discipline that causes a lot of us to not think about saving for retirement.
Solution: Thankfully, there are available options for self-employed individuals to make contributions to retirement. This makes it easier for you to give with discipline rather than just saving it in a bank. Another bonus of doing this is the interest rates you can incur after years of giving contributions. Some options are:
- Traditional IRA or Roth IRA: This is ideal for those who are starting out. The contribution limit is $ 6,000 a year. The great thing about these IRAs is that they are tax-free when withdrawn during retirement.
- Individual or Solo 401(k): If you are a self-employed individual with no employees and have a higher rate of earnings, this may be the ideal plan for you. You can have a contribution of up to $ 56,000 yearly or 100% of your income.
- SEP IRA: This is an ideal plan for business owners with a small number of employees. The advantage of this is deducting the lesser of your contributions or 25% of your earnings during tax returns.
- SIMPLE IRA: This may be the best choice for self-employed people with a large pool of employees. In this setup, employees can also contribute through salary deferral.
Of course, this all depends on your unique situation. You may ask an experienced financial advising company to help you pick the best retirement savings plan given your circumstances.
Retirement savings are a crucial part of life. As a self-employed individual, it is important to pay attention and save when you can, especially if your earnings fluctuate from time to time. When you no longer have the resources to earn an income, it can save you from a financial struggle in your later years.
