How Do You Retire If You Have a Home Business?

Working for yourself may be a dream come true in many ways. Whether you are an entrepreneur or freelancer, you no longer have to be accountable to a set schedule or spend countless hours building a business for somebody else. Deciding to work for yourself is probably something you spent a lot of time considering.

What you might not have considered, however, is how you would eventually retire, especially if retirement is still a ways off. It is still important, no matter your age, to keep in mind that you will need to retire one day, and that you don’t have a company pension or 401K when you work for yourself.

One survey discovered about 40 percent of those who were self-employed weren’t putting money away consistently toward retirement, and about 28 percent weren’t saving for retirement in any way. One reason may be that the self-employed don’t really understand what is available to them. Here are 13 things you should be aware of about retirement if you work for yourself.

1. You Can Save More Than in a Traditional Job

When you work for a corporation, you can put a maximum amount into your 401K of about $18,000 — which can vary from year to year — and up to $24,000 if over the age of 50. However, those who open a SEP-IRA for the self-employed can sock away about 20 percent of their net income up to $54,000 — again, the cap can vary from year to year. This means you have an opportunity to save more than double what you could at a traditional job.

2. Get in the Habit

When you own a small business, it is easy just to keep reinvesting in that business instead of putting money toward retirement, especially when you are first building it up. However, it’s more important to get in the habit of saving a percentage of your income, just as you would with a traditional job. While putting 20 percent away is ideal, it is better to put 5-10 percent away than nothing at all. Each time you receive payment, set aside the money for taxes and then set aside money for retirement. What is left is what you run the business on and then live on. It requires careful budgeting.

3. Figure Out What You Need

An important step in figuring out how much you should save is figuring out what you’ll need when you retire. You can use a retirement calculator to input how much you have saved, your age and how much income you need after you retire. You can even input life expectancy to match the age your family members typically live. The calculator will tell you if you have enough money, or need to save more.

4. Choose Your Risk

Where do you put the money in your IRA? It’s an important choice. You can choose to enter a mutual fund, let a financial adviser manage your funds or invest in individual stocks. It is important to assess the risk of different types of investments and choose one that works for where you are on the retirement ladder. If you are just starting out and are fairly young, then you might invest a bit riskier in an attempt to gain big profits. However, if you’re closer to retirement, you’ll want to invest more conservatively.

5. Is a Roth Right for You?

Choosing between a traditional IRA and a Roth IRA can be a challenge. As a small business owner, you likely pay self-employment taxes. Opening a traditional IRA allows you to reduce your tax burden a bit. However, you will pay taxes on that money when it is time to pull it out of your retirement account. On the other hand, a Roth IRA allows the money to grow interest-free, but you’ll pay taxes up front and you won’t be able to reduce your tax burden. Some people choose to have both, putting half into a traditional IRA to help reduce taxes and half into a Roth IRA. Again, a good financial advisor can help you decide what works best for you — both in the short term and the long term.

6. Nix Debt

If you have a home business, you need to nix as much debt as you can. Debt can make it more difficult for you to retire, because you have more monthly payments. Instead, pay off credit cards, automobiles and eventually your home so you have lower expenses and thus need less money at retirement. If you make just one extra payment per year on your mortgage, you can pay it off a couple of years early. You may also want to look into refinancing your home at a lower interest rate and on a 15-year mortgage to pay your home off even sooner.

7. Over 50?

There is some good news for those who are late starters to retirement savings. The IRS allows you to make some catch-up payments to get you up to par with where you should be in the retirement savings game. For example, if you’re under 50, you can contribute $18,000 to a 401K, but if you are over 50, you can contribute $24,000. In the world of accruing interest, every little bit helps, so that extra $6,000 a year can help you get where you need to be before retirement.

8. Set Up Automatic Withdrawals

Almost all investment companies allow you to set up automatic payments into your retirement account. This is a smart idea, because it makes saving a priority and sets it up like another bill. You’ll know the amount is going to be withdrawn monthly or quarterly and can prepare ahead of time. Also, by contributing regularly to your account, you will hit the market highs and lows so you are buying stocks when they are low as well, and making more of a profit at those times. This practice will help balance your account from any regular market shifts.

9. Make Your Retirement Account Off-Limits

When you run into a downturn in business or need something new, it’s tempting to pull money from your retirement account. You may have every intention of putting that money back quickly, but life has a habit of getting in the way. On top of that, you will run into penalties for withdrawing early, and on top of that, the IRS will treat the withdrawal as income. All the taxation issues can eat into your savings quite a bit. Most of the time, it simply isn’t worth it.

10. Save Cash Too

You’ve likely heard the saying not to put all your eggs in one basket. This can apply to retirement as well. It isn’t a good idea to retire and have all your money in stocks. Instead, you’ll want to also save some in cash you can easily access, such as money markets or CDs. Rates for these will vary, so shop around, but also make sure they are places where you can access your money easily without paying out too much of a penalty in an emergency situation.

11. List Your Beneficiaries

While everyone would love to reach the age of 100 and spend every penny in their retirement accounts, there are sometimes situations that don’t allow this. Accidents, disease or family longevity can all impact your lifespan. You work hard to build your business and for your money, so if the unthinkable happens, you want those you love most to benefit from all that hard work. Take time to fill out the beneficiary info on your account so in the worst-case scenario, your spouse and/or children will be able to claim your funds. With most accounts, you can list a primary and secondary beneficiary. So, if you list your wife as the primary, but you and she are killed in a car accident, the secondary beneficiaries might be a 50/50 split between your two adult children.

12. Watch Hidden Costs

Different investment companies and funds charge varying rates to keep that fund going. You are paying for the expertise of those managing your money. However, these rates can vary widely, and some companies will eat up all your funds in fees. The “fiduciary rule” now states financial advisers and brokers have to disclose all costs and must put your interests first. Hold them to this, as many work on a commission. Know the costs — including hidden ones — and which place is best for your money. Being able to retire is more than just putting away money: You have to be smart about how you put it away.

13. Downsize

Do your bills feel out of control and you can’t picture where the money to put into a retirement account might come from? Look for ways to downsize your life and your costs. Can you survive in a smaller house? Do you really need a brand-new car, or can you sell it and pay cash for a used one? What items aren’t you using that you could sell off and use to pay down debt? When you take the time to really stop and look at the world around you, you might find you have far more stuff than you could possibly need.

Owning a home business has plenty of challenges, but retiring doesn’t have to be one of them.

Plan ahead, save what you can, be smart with your investments — and before you know it, you’ll be sipping fizzy drinks on the beach and enjoying the warm glow of retirement.

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