The Cost of a Ripe Old Age
Before we dive in, let’s talk about the numbers. Knowing how much to save for retirement is an essential part of any entrepreneur’s plan. While there’s not a golden number, in an article from Fidelity.com, it’s suggested that by age 35, “you should have saved 1x your current salary, then 3x by 45, and 5x by 55.” Other experts will throw out $1 million as a magic number for retirement, while some will say you need much more. These numbers vary, especially depending on the type and quality of life you plan to live during your golden years. I recommend you check out this useful retirement calculator to get a handle on what you need. Ilene Davis, a self-employed certified financial planner, explains that making these calculations “is actually quite easy. The hard part is deciding on realistic assumptions for life expectancy, inflation, rate of return, etc.”
Currently, the average retirement savings in the U.S. is pretty abysmal, with the 401(k) balance of seniors being, on average, around $200,000 dollars. At first glance, this may sound like a reasonable amount, but it translates to about $8,000 for each year of retirement. Whether you want to spend your golden years traveling on a cruise ship or just fishing on a dinghy, you’ll likely need more money to stay financially afloat.
As for the timeline for retirement, you’re never too young to start. Davis believes you should be saving for retirement as soon as you start earning income. After all, a large percentage of your retirement savings will come from interest, meaning the power of these investments is directly connected to the amount of time you save. If you start saving at a young age, a single year’s worth of investing can be the difference of a hundred thousand dollars (or more) in your retirement fund.
How to Save for Retirement
Much like the amount of retirement savings, the method of obtaining these savings differs from person to person. After you’ve pinned down your expected quality of living, you need to develop a plan for getting there.
Ilene Davis, Certified Financial Planner
Davis firmly promotes solo 401(k)s for someone who is self-employed and wanting to set aside a hefty amount of their income. Solo 401(k)s, also called individual 401(k)s, allow you to invest money as both an employer AND as an employee. This means you’ll be able to stash away up to $18,000 (in 2015) as an employee, and then, as an employer, you can add an additional 25% of your compensation. “This is a GREAT plan,” says Davis, “but it’s limited to companies that have no non-family employees.” To learn more about Solo 401(k)s, check out this guide from the IRS.
Andrew Schrage, Founder and CEO of Money Crashers
After becoming disillusioned with the corporate world, Andrew Schrage and his partner launched Money Crashers, a financial education website that is dedicated to helping its readers stay out of debt, save money for the unexpected and make all-around better financial decisions. Schrage explains that the beauty of self-employment comes from the “freedom to work when you want to (most of the time) … and you call the shots regarding how your operation is run and how it expands.”
Much like Davis, Schrage adamantly suggests that people who are self-employed begin saving for their retirement as soon as possible. “It can be easy to put this on the back burner when launching a small business, but that is a mistake,” says Schrage. “Income is inconsistent a lot of the time for small business owners, so the more you can invest for retirement when you have extra money, the better off you’ll be.”
Schrage, who plans to fully retire around sixty-five, currently has both a Roth IRA and a SEP IRA that he tries to fully fund every year. He explains “Once you get yourself into a savings mindset, it gets that much easier to make it a habit. After the good months, set aside extra. There will typically be months ahead where you won’t be able to save as much.”
Eliza Cross, Author and Blogger
For self-employed author and blogger Eliza Cross, creating a nest egg for her retirement is an important pursuit. But beyond that, she also desires “good health, sound mind, and strong bones” throughout her golden years, as well as the ability to continue working toward the greater good. Cross, who writes about sustainable choices, saving money and more on her blog, Happy Simple Living, currently has a traditional IRA that’s invested in stocks and bonds, as well as a Roth IRA, which is invested in conservative FDIC-insured CDs. She set up the Roth IRA after the financial crisis, hoping “to have one account that couldn’t lose value.” The balancing act between financial security and larger returns is a common goal of those who are self-employed. “I also save every $5 bill that comes my way,” says Cross, “and when I reach $50, I put it in my savings account. When the account reaches $500, I buy a CD and start over again.” Setting goals for yourself is an excellent way to save for retirement. Small amounts, when invested properly, can become an impressive retirement fund. Check out this investment calculator from Bankrate to see where your investments will take you.
Cross’ goal is to save $1 million for her retirement savings, but even after she retires, she fully plans to continue working, thereby diminishing the amount of income she’ll need to supplement. Beyond building her savings, Cross focuses on cutting spending, going as far as to downsize to a smaller home, grow some of her own food and pursue DIY projects instead of calling on professionals. Cutting out unnecessary costs is a reasonable way to put more money toward retirement funds. Even if you’re only adding a small amount every month, at a 7% interest rate, these funds will grow enormously over the course of your work life.
Retirement Savings and Where to Find Them
There are a variety of ways for self-employed individuals to achieve their retirement dreams, but it requires a well-researched plan and continuous ambition. In the end, the devil is in the details, so you need to make sure you sit down, rev up the calculator and create a plan that works well for you. And remember, time is of the essence. As Davis explains, “The sooner one starts investing, the more likely they are to build a life around a spending and saving plan that will make a comfortable retirement truly an option.” In other words, while retirement can be a time of uncertainty, having a plan will provide you the financial security you need. So take life by the horns, dive into your research and discover what works best for your retirement goals.
If so, subscribe now for tips on home, money, and life delivered straight to your inbox.