Financial Literacy Basics When You’re Planning for Retirement

When you work for yourself, it’s never too early to start socking away some bucks for retirement. In fact, part of being a financially “literate” entrepreneur means proactively managing your money today so you can enjoy a comfortable retirement in the future. Does that lofty goal seem far-fetched (not to mention far off)? We get it. Let’s think about your options, and take it one step at a time.

Get started today (no, really)

The idea of saving for the future may be daunting, especially if your instinct is to put every dollar you generate right back into the business. Here’s a reality check: The earlier you start saving, the longer your retirement savings will have to grow. Trust us, saving small is a lot better than not saving at all. Does $50 a month feels comfortable? If you save $50/month for 40 years with a 6% annual rate of return, your investment will total $100,000!

Set a goal of one day saving up to 15% (or more) of your annual salary.

Understand your savings options

Small business owners have several sound options for contributing to and growing their retirement funds. Here’s a quick overview of four of the most popular accounts.

Roth/Traditional IRA. Both these Individual Retirement Arrangements are investment accounts managed by a brokerage or financial institution. You can access funds from either one when you’re 59 ½ years old, unless you’re willing to pay a penalty. The Traditional IRA is for pre-tax dollars that you’ll be taxed on when you withdraw in the future. The Roth IRA is for post-tax dollars which you can access, tax-free, later on.

SEP IRA. The Simplified Employee Pension IRA is set up by an employer (in this case, you) on behalf of an employee (again, you or someone who works for you). You’ll contribute pre-tax dollars until you withdraw at 59 ½, at which point your money will be taxed at your current income rate.  

Solo 401k. Also known as an “Individual 401k,” a Solo 401k is for owner-only companies with no employees. It covers only you (or you and your spouse, if any). You can set up a solo 401k whether your business is incorporated or a sole proprietorship. You can contribute to it as both an employer and as an employee, which gives you the option of saving more money each year.

Personal Defined Benefit Plan. This is an option for people who can make a significant contribution each year – to the tune of 250K or more, according to Charles Schwab.  

There’s a lot more to learn about the pros and cons of each of these retirement savings plans. This article explains what you need to know.

Make saving as easy as possible

Here are four more strategies to help you put away those precious dollars, each and every month:

1. Automate your savings. Set up an automatic, no-excuses withdrawal system that transfers funds from your checking account into a retirement account.
2. Get real. Take a long hard look at what you envision for your retirement, including what all your expenses will be (for example, food, rent, travel, insurance and medical).
3. Cut back now. If saving for retirement seems simply out of reach, consider what expenses you can trim today. Are you traveling regularly? Is your home bigger than you need? Are you single-handedly supporting your local coffee shop with your organic almond-milk mochaccino habit? Tightening your budget for retirement savings isn’t easy, but it’s better to do it now than later, when it might be too late.
4. Hire an expert. You don’t have to figure this out on your own. An experienced financial advisor can guide you on choosing a savings plan, making investments and more.

Expert insight:

“The clock is ticking! The strategy you choose for tomorrow will determine how you run your business today!” — excerpt from “Creating an Exit Strategy for the Solopreneur” presented by Leslie Shiner, owner of The Shiner Group

QB Community wisdom:

“It’s hard to retire from the service industry. Right now, if we’re not working, there’s no money coming in. My goal is to be financially safe and sound, so my son doesn’t have to go through the hardships I’ve faced. My son’s picture is the screensaver on my phone. Every day, he’s the motor that pushes me through.” — Gregg Miele, owner of Heart & Hustle Gym

There’s more to think about when it comes to boosting your financial literacy:

Financial Literacy Basics When You’re Just Starting Out

4 Ways Accountants Can Put Financial Literacy in the Spotlight

Financial Literacy Basics When You’re Looking for Funding

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Before you go

QB Community members, what tips can you share to make saving for retirement each month a little bit easier?