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You Will Thank Us Later – 5 Tips to Create a Retirement Plan for Entrepreneurs

5 Useful Tips on Retirement Planning for Business Owners

Most working class Americans are employed by companies that either require or offer retirement savings options in the form of a 401(k), 403b), or pension plan. Because these contributions are automatically deducted from the employee’s paycheck, saving for retirement tends to be a rather painless process. Over time, the cumulative effect of regular monthly contributions leads to a nice sized nest egg that can be used in the retirement years.

But for entrepreneurs, the story is a little different. With no steady paycheck or employer-sponsored plans, many of these hardworking individuals forgo retirement contributions.  And though it may not seem like a big deal in the early years, this misstep can prove to be dangerous and irresponsible as entrepreneurs age.

Entrepreneurs and Retirement: Troubling Data

Millennials catch a lot of flak in the financial planning world for not saving nearly enough money for retirement, but they aren’t the only segment of the marketplace that’s coming up short. According to a survey by Manta [1], an online community for small business owners, entrepreneurs are falling behind [2].

Research from the Manta survey suggests that 34 percent of entrepreneurs don’t currently have any retirement savings plan – even though 60 percent say they plan on retiring before the age of 65. And of those that do have retirement savings, the majority are significantly underfunded according to their age and retirement goals.

The question is, why are entrepreneurs failing to give retirement the attention it deserves? Here are a few of the more pertinent factors:

How Much Should Entrepreneurs Save for Retirement?

Saving for retirement is important. It provides financial security in the latter years of your life when you may be unable or unwilling to work. For some, retirement savings are enough to provide opportunities like traveling or exploring new hobbies. For others, the money is needed to fund healthcare expenses or pay off debt.

There’s no specific amount that’s regarded as the perfect retirement number. How much you need to save depends on your personal circumstances, goals, needs, hopes, and dreams. But there are some rules of thumb you can use to determine a ballpark number.

“For example, two pieces of common advice are to save at least 10 percent of your income while working and withdraw 4 percent from your retirement savings annually during retirement,” RISE mentions [4]. “There are also milestones that try to simplify the answer, such as having your annual earnings in retirement savings when you’re 30 and six times your annual income in retirement savings once you’re 55.”

But, again, these are oversimplified suggestions. There are countless factors that determine what you need to have saved up. One person retiring at age 60 may be able to make do on $750,000, while someone else retiring at age 70 may need $2 million. Health needs, insurance, and lifestyle factors all need to be carefully considered and projected. It’s for this reason that it would be smart to meet with a retirement planner or financial advisor – even if just one time.

5 Useful Tips on Retirement Planning for Business Owners

Just because you’re an entrepreneur without an employer-sponsored plan, doesn’t mean you can’t save for retirement. In fact, it means you need to be even more disciplined and vigilant with tucking away money for the future.

Fortunately, saving for retirement doesn’t have to be a monumental feat or a significant source of frustration. Using the following tips and techniques, you can begin to set things into motion.

1. Know Your Options

The first step is to understand your options. While you don’t have access to an employee-sponsored fund or pension plan, there are plenty of investment products for self-employed entrepreneurs. Some of the more popular include:

There are a handful of other retirement products as well, but simple is sometimes best. Start with one of these (or a combination) and go from there.

2. Slow and Steady Wins

Albert Einstein famously called compound interest the most powerful force in the universe – and it would be hard to argue otherwise.

As this chart shows [5], you don’t have to invest a lot of money to become wealthy in retirement. Rather, it’s a slow and steady climb. For a 25-year-old entrepreneur to accumulate $1 million by retirement age, she would only need to invest $241 per month (assuming a rather conservative 8 percent average rate of return).

3. Create a Budget

Different rules of thumb say how much money you should put aside for retirement, but most financial advisors suggest somewhere between 10 to 15 percent of every paycheck. To do this with consistency, you’ll need to develop a monthly budget that keeps you disciplined and on track.

Using your budget, you’ll be able to determine how much you can realistically invest while still covering monthly expenses, existing debt, and other needs. And with this amount, you can then set up automatic monthly deductions that streamline your investing and make it as hands-off as possible.

4. Diversify

Within your IRA or Solo 401(k), you’ll have to determine exactly what you’ll be investing your money in. Regardless of what anyone tells you, it’s unwise to be investing in individual stocks. You’re far better off spreading out your risk by making investments in a variety of mutual funds.

“If you follow what I teach, you know you want to invest in good growth stock mutual funds and spread your investment across four categories: growth, growth and income, aggressive growth and international,” retirement expert Chris Hogan writes [6].

You may or may not agree with Hogan’s exact approach, but you should be diversifying to a degree. Come up with a plan and be sure to spread out your risk.

5. Keep Your Hands Off

Finally, keep your grimy hands off your retirement account! You’ll be tempted to pull out money or move it around when the market dips – or to buy a bunch when the market is booming – but don’t! Regular investments in both bull and bear markets will ensure you get a healthy rate of return. (And never withdraw prematurely! The penalties, fees, and taxes aren’t worth it.)

Do You Have a Plan?

Saving for retirement may seem complicated and time-consuming on the surface, but it doesn’t have to be. With a disciplined plan in place, you can develop a strategy that sets you up for success over the long haul. At this point, you’ll only need to check in a couple of times per year to evaluate, tweak, and make necessary adjustments.

Don’t be part of the 34 percent of entrepreneurs who lack a retirement savings plan. Be purposeful and diplomatic with how you handle your financial future. You work hard and owe it to yourself to be smart.

Image: Depositphotos.com