Self-employment is increasingly popular in the United States. According to Alliance Virtual Offices, the number of business startups (entrepreneurs or solopreneurs) grew from 3.5 million in 2019 to 4.4 million in 2020, a 24 percent increase.
Women entrepreneurs are leading the growth as they are a driving force in the economy. The average life expectancy for a woman in the United States is three to five years longer than a man. As a result, women should save and invest more today, so they have enough income to live comfortably in retirement.
Being the boss is rewarding—You choose your work hours; take vacations and sick days at your leisure—however it comes with many responsibilities.
If you are an entrepreneur or a small business owner, you often outsource responsibilities to your employees or freelancers so you can focus on managing the business itself. If you are a solopreneur, your responsibilities include producing and delivering products or services to keep your business afloat.
Either way, when you are in the thick of running your business, searching and planning for a retirement plan is not at the top of your to-do list, especially if you are in your 20s or 30s.
Financial Advisor and Retirement Strategist, Jefflyn Dangerfield says, “When most people under 30 think of retirement, they often think of old people and old things. However, when you reach 40, for most, retirement becomes a very real and important consideration.” She adds, “The realization of not working for the rest of one’s life becomes very realistic… and the realization of not having money to live on, becomes a very vivid thought.”
Despite all the responsibilities the entrepreneur handles and the outgoing expenses, experts say it is important to consider incorporating retirement savings into the budget sooner than later. Dangerfield says, “One of the biggest downfalls of small businesses is planning for all elements of success.” In her book, The Retirement Trilogy: A mini book series with written adaptations from the ‘I’m Your Agent Podcast,’ she states that one of those elements is succession planning and or retirement planning. “The small business owner is so busy trying to make the business succeed, they do not plan for what happens down the line.” Because day-to-day activities overwhelm solo and entrepreneurs, they put off searching for the right retirement plan. Dangerfield says that we don’t start looking at retirement until we tire of dealing with people. “Around 40–45 years old, we look at things differently. That’s when we think about taking care of ourselves.” 34 percent of entrepreneurs do not currently have a retirement savings plan, according to a survey by Manta, an online community for small businesses. The survey reports that their top reasons for not saving for retirement include insufficient income (37 percent), using previous savings to invest in their business (21 percent), and planning to sell their business to fund their retirement (18 percent). Another reason for not saving for retirement is that entrepreneurs are sometimes reluctant because they are afraid they won’t have quick access to the funds if they need them for the business. Searching for the right retirement plan is not as intimidating as you may think, but the key is to start. Dangerfield says, “It doesn’t matter how much you start with; it matters that you start.” So where does one start? First, you must understand what types of plans are available for the self-employed. The three most common types of plans recommended for entrepreneurs and small business owners are:
• Savings Incentive Match Plan for Employees (SIMPLE) IRA • Simplified Employee Pension (SEP) IRA • Solo 401(k) Simple IRA If you are an entrepreneur and expect to expand, you can continue investing even after you’ve hired an employee, but you must match your employees’ contributions, up to 3% of their pay. SEP IRA A SEP IRA, which stands for “simplified employee pension,” is ideal for small business owners because it doesn’t require much paperwork or maintenance offers some funding flexibility. Contributions are tax-deductible. Solo 401(k) A Solo 401(k) is a retirement account designed for the self-employed, or business owners with no full-time employees. If you plan to build your retirement plan quickly and have a lot of money to contribute, this is the plan for you. You may make contributions both as an employee and as an employer, maximizing retirement contributions and business deductions. The Retirement Trilogy simplifies examples and hacks in her book to make the who, the what, and the why of the retirement strategy easy. For example, Dangerfield explains: If you go to Starbucks every day and you spend $15 for a large coffee, at least five days a week, that’s $300 per month. Instead, if you downsize to a small cup, you not only satisfy your coffee craving, but you also can take your savings and address your retirement need, and you haven’t spent an extra dime to do it. For hairstylists, she says if you do 10 heads per week normally to take care of your expenses, do one extra head and put that money away for retirement. For client-based businesses, Dangerfield suggests taking $50 to $100 off the top, per monthly retainer, and adding it to your retirement fund. In the three-book resource, each section lists takeaways at the end to ensure the reader understands what they read. Here are a few examples: • Set a goal for what it will take to maintain your lifestyle once you retire, or when your career is over. • Start your supplemental plan as soon as possible. The younger you save for retirement, the less you may have to save to secure your retirement goal. • Be aware that if you work or secure income from a professional career, you will have an income gap that will need to be filled. • Remember to factor paying taxes into your plan. • If you are in entertainment, a professional athlete, or an artist, make sure that you set aside a percentage of every check you receive from every source you receive towards a future retirement plan. • If you are a small business owner, the sole responsibility for retirement planning for yourself and the business is on you. The cost, however, may be shared. • Expect to have more than one stream of income coming to you to maintain your lifestyle. Even if retirement is decades away, getting a jumpstart will allow you to retire comfortably. The key is understanding your options. Seeking a qualified financial advisor will help you decide which plan is right for you, depending on your business, your goals, and your preferences. To learn more, please visit Dangerfield’s website and listen to the “I’m Your Agent” podcast.