No matter what stage of self-employment you may be in, thinking about how to make your investments last in retirement should be a top priority. If you are ahead of the game and already have a retirement fund in place, now's the time to consider how you can maximize it.
A key way to optimize the return on your investments is by using an income investing approach. By collecting cash flow from dividends from stocks, interest from various types of bonds, and distributions that come from a variety of investments, you can create a solid portfolio.
Each stage of self-employment comes with a different list of “to-do’s” when it comes to retirement planning. In order to keep yourself on track, try to follow these tips.
Stage 1: Early Stage of Self-Employment
The early stage of self-employment may be the most overwhelming, especially if you’ve left a traditional career in the workforce to start your own business or become self-employed. Right now, retirement is probably the last thing on your priority list, but there’s no better time to start considering your options.
Don’t Become Dissuaded by Contribution Limits
Even if you can’t put in the cap amount on a retirement account, that doesn’t mean you should forego saving altogether. Instead, focus on saving what you can, when you can, especially in the early stages.
Automatically Deposit Money Into Retirement Accounts
It will be out of sight, out of mind, and then you don’t have to worry about it.
Look Into an Individual 401(K)
This is only an option if you have no employees. This is also the perfect account if your spouse hopes to contribute too. If you choose a Roth plan, you can also enjoy tax-free withdrawals once you hit a certain age, which is typically helpful when you’re self-employed.
Invest in your own company, but also consider other businesses in your industry, particularly if your own proprietorship has a hard year. You’ll diversify your portfolio and your assets.
Talk to Your Financial Advisor About Rolling Over Savings
Depending on the amount of savings you have already accumulated in your retirement accounts, rolling your accounts over into a new, self-employed retirement plan might be more complex than you anticipated. Speak with your financial advisor about the best route to take, whether that includes investing the money or simply adding it to your current plan.
Stage 2: Mid-Stage of Self-Employment
If you are in a position where you have been self-employed for more than 10 or 15 years, you may have a retirement account nest egg already. However, there’s an alarming number of Americans who still don’t have retirement accounts at this phase. If you find yourself in this position, consider these steps:
Start Thinking About an Exit Strategy
Do you plan to work forever? Do you hope to sell your business or will you pass the torch on to a family member? These are things to consider when you’re looking at your retirement options. You’ll want to make sure your business can function and thrive without you there. You’ll want to establish a deadline of when you’d like to retire so you can plan accordingly. At this point, you need to start reviewing the financial implications of your exit.
Review Your Assets
You should start taking note of your company’s assets and how they can become part of your retirement plan. Do you have a lot of liquid assets, or is everything tied up in the profits from your business? Developing a retirement plan can include itemizing your assets and learning how they’ll turn into a retirement account after you’ve stopped working.
Envision the Retirement You Want
Do you want to travel? Do you still want to work as a consultant in your industry? These decisions affect how you save for retirement. You might consider freelancing or staying on with your company as a consultant for retirement income.
Max Out Your Contribution Limits
Your savings are important, so if you can start maxing out your retirement accounts now, you should. Your contribution limits depend on the type of account you choose, but you might look into investing some of the savings you’ve already accumulated into your retirement. If you have invested your savings in an account, be aware of any tax penalties if you choose to make withdrawals early.
Stage 3: Late Stage of Self-Employment
The late stage of self-employment can be a scary one – where do you go from here? If you’re hoping to sell your business or pass it along to a friend or loved one, the options may be overwhelming. Many assume that the profits from selling their business will be enough to carry them through retirement, but that’s not always the case. By this time, you should be in a position where you have reduced your personal debt and you have started calculating how much you need to retire. From there, consider the following steps below:
Diversify Your Investments
While it’s important to invest in your own company, it’s equally important to diversify your investments to give your portfolio more overall strength. These liquid assets can turn into retirement income for you and your family.
Give Yourself Time to Sell Your Business
Selling your business doesn’t happen overnight and can require a lot of work on your part. Don’t wait until you’re reaching retirement to start looking at your options and prepping your business for sale.
You May Not Receive a Lump Sum
Often, small business owners receive payments for selling their business and not a lump sum. If this is the case, it’s even more important to consider your portfolio and investments to sustain yourself in retirement.
Boost Your Savings to 20% or More
At this point, many financial pressures, such as paying for a mortgage or putting your children through college, are no longer an issue. Try to fill those retirement accounts as much as you can. Consider investing in stocks. These are assets that generally stay ahead of inflation and can carry you through retirement, even if you’ve only recently acquired them.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.