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A Retirement Planning Roadmap for the Self-Employed

Retirement. The beginning of a new chapter in the life of a small business owner. Everyone dreams about the transition from the world of work to the freedom that retirement brings. Maybe one of your initial reasons for starting a business was the desire to retire early, or to ensure a secure retirement for yourself and your family. You are not alone in your desire for that independence and peace of mind.

The National Association for the Self Employed is here to provide you with the knowledge to make retirement planning less painful. As a business owner you understand the right knowledge is crucial to your business success. Here’s what you need to know about retirement planning.

Know Yourself
When building a business it’s important to understand who your customers are and what those customers need. When planning for retirement it’s important to know what YOU want and what YOU need. Everyone’s vision of an ideal retirement is different. When you picture yourself in retirement what do you see? Do you envision a highly active lifestyle with constant travel, filled with your favorite hobbies and entertainment? That sounds wonderful, but know that you will need to plan for those additional expenses. Do you see yourself living a low key lifestyle, nurturing your close relationships and enjoying the simple things in life? Whether you plan on globe-trotting or staying close to home, you can plan ahead for your retirement dream. Get specific. Where will you live? What is the cost of living in that area? Will you have educational expenses for children or grandchildren during your retirement? Will aging parents need your financial support? A clear understanding of your wishes and dreams for retirement, as well as your responsibilities and possible challenges, will help form the pieces of your retirement puzzle into a complete picture.

Know Your Numbers
Next, do some calculations to determine how much income you will need each year to fund your retirement vision. As an entrepreneur you are in control of the choices you make concerning your business. You budget for necessities such as a mortgage or rent, utilities, insurance and supplies. You’ll do similar decision making and budgeting in planning for retirement. Review the retirement activities and expenses you identified. After taking inventory of those costs, what annual income will you need to fund your retirement lifestyle? Using an estimated life expectancy of between 80-85 years and a retirement age between 60-65 years, we can expect about 25 years of retirement. If your estimated annual income needs are $50,000 per year, you would need $1,250,000 in total savings.

Wondering if you should factor Social Security into your annual retirement income? Experts have traditionally included those benefits into their calculations. Unless you are already very close to retirement, things have changed. Many experts now choose to be cautious, disregarding those amounts due to proposed legislation changes. There is no guarantee Social Security will continue to exist in its current form, or exist at all, by the time you reach retirement age. You can plan for a secure retirement based on your own calculations, independent of legislative outcomes. If Social Security benefits are still available when you retire, you receive an unexpected income increase!

Know Your Options
Now you are clear on the life you want to live in retirement and the amount of income you need. How do you start moving toward your goals?

There are three retirement plan options well suited to small business owners. They each have unique features to consider. All options allow you to make tax free contributions to the plan, lowering your taxable income. The contributions are also tax deferred, allowing your money to grow tax free until the funds are withdrawn. If you need to draw from these accounts before age 59½, a 10% early distribution penalty applies.

These retirement accounts are easily accessible and widely available. Opening a new retirement account can be an opportunity to strengthen your relationship with your current financial provider, or build a new one.

SEP-IRA
How much can I contribute?
A SEP-IRA (Simplified Employee Pension Plan) allows you to stash away 25% of your self- employment business earnings. The maximum contribution is $56,000 for 2019. Since the contribution is not due until your tax return is filed, this allows you the flexibility to increase or decrease your contribution based on your business income. Small business owners experience ups and downs. In higher income years, you can contribute more. In leaner times, you can opt for a lesser amount or even forgo that year’s contribution. You are not obligated to contribute every year.

What else should I consider?
SEP-IRAs are funded by the employer only. If you have employees you must make contributions for them at the same percentage rate as your own. For example, if you contribute 10% of your earnings for yourself, you must contribute 10% for each employee as well. The contributions you make are tax deductible business expenses.

SIMPLE IRA
How much can I contribute?
A SIMPLE IRA (Savings Investment Match Plan for Employees) is funded by both employer and employee contributions. Employees contribute to the plan through a pre-tax payroll deduction. Business owners either match those employee contributions up to 3% of an employee’s compensation or make a flat 2% contribution on behalf of all employees, regardless of the employee contribution. For example, if you choose the flat 2% contribution and your employee Sam Smith earns $20,000 in W-2 wages, you must contribute $400 for Sam. If you choose the matching option, and Sam contributed $1,000 of his $20,000 wages to the plan, you would make an employer contribution of $600 for Sam. If you choose the matching option but Sam makes no contributions on his own, you would not make a contribution for Sam. The maximum contribution to a SIMPLE IRA for 2019 is 100% of compensation, up to $13,000. If you are over 50 years old, that maximum increases to $16,000.

What else should I consider?
This plan has a higher penalty for withdrawing funds prior to retirement age. Any distributions taken within the first two years of plan participation and before age 59 ½ are subject to a 25% early withdrawal penalty in addition to your current tax rate.

SOLO 401(k) or SELF EMPLOYED 401(k)
How much can I contribute?
401(k) plans have become the retirement plan of choice for large corporations due to their flexibility, high contribution limits and employee ownership qualities. These plans are also available to micro business owners, covering you, the owner, and your spouse. The solo 401(k) allows you to make contributions as both an employer and an employee of your business. For 2019, you can make payroll contributions up to $19,000 as an employee. As an employer, you can make a profit sharing contribution up to 25%. That’s a possible $56,000 in plan contributions.

What else should I consider?
There is more paperwork necessary to administer this plan. A solo 401(k) plan may need more documentation updates due to legal changes. The solo 401(k) also requires an annual tax filing (Form 5500) when plan assets exceed $250,000.

Know The Right Experts
The NASE understands that collaboration with the right partners, connections and networks is key to growing a business. That’s why we offer 24/7 access to experts to assist you in all aspects of your business, from Information Technology to Marketing. Certified Financial Planners and tax advisors can assist you in moving toward your retirement vision. Certified financial planners offer a variety of services to meet your specific needs. This can range from simply reviewing a retirement plan you have created to organizing your information into a formal written plan.

Know When To Pivot
Things can, do, and will change. We know this to be true in business and in life. A business can experience a downturn or a boom. A succession in a family business can affect business plans and profits. As things change be sure to build those new circumstances into your retirement plans as well as your business plans. A paid off mortgage can result in lower housing expenses in retirement. Assisting a young family member in starting a business of their own can increase your expenses. Account for these changes in your numbers to keep your plan current.

Conclusion
You can move toward your retirement vision while building a business at the same time. Creating a solid plan and taking action are your first steps toward success. With the right mindset, focus, and a clear mission, retirement planning need not be a tedious task. Use careful self-assessment and your knowledge base to get your plan on the right track.