The other day, we were hanging at my parents house and I was sitting with my mom, sister, and sister-in-law and we got on the topic of retirement and more specifically planning for retirement as an entrepreneur. All of us kids have our own businesses and so we’ve had to figure out what it looks like to spend, save, and invest in ourselves and in our futures. My sister and I were talking about tax classification and other nerdy things and that conversation inspired this episode because these offline conversations are what a lot of us are craving online – they are the topics we find ourselves googling or worse, putting off because we’re intimidated.
I want to spend this episode talking all about planning and saving for retirement as an entrepreneur.
I want to say up front, I’m obviously NOT a certified financial professional and cannot legally provide financial advice. With everything, consult your team of professionals in your life. However, while I do want to share my own experiences, I more so want to lean on the research and advice from people WAY smarter than I am in the financial sphere.
So whether you have your retirement plan halfway devised, your 401k is booming or you don’t know where to start when it comes to creating a plan, let’s dive on in to what financial experts advise for entrepreneurs who are ready to prioritize their financial futures.
1. Determine your retirement goal.
Coming up with the amount of money you’ll need to retire seems so arbitrary right now when many of us are years and years away from retirement. I mean, the national average is retirement at the age of 62 which means I’ve got 28 more years, but I don’t want to wait that long. That’s why it’s important to have a number so that you know what you’re working toward, track your progress and break down your goal into monthly and yearly actions.
If you’re curious, the general recommendation is to save and invest at least 15% of your pre-tax income for retirement starting by age 25. If you’re starting later, you’ll likely want to put aside a higher percentage. So be honest about where you’re at, how old you are, and what you should be putting aside now.
If you’re wondering how you can roughly figure out how much money you’ll need after you retire, use the 25x rule. You start by estimating your annual expenses in retirement and multiply that number by 25. Consider variables like how much money you’ll need for basic living costs but don’t forget to figure in all expenses, even things like vacations. You’ll want to factor what age you’ll stop working entirely, whether you might face any big medical expenses, and how long you realistically think you might live.
I know, all of this is sort of morbid BUT it’s important to start thinking about and getting curious about now, while you have the energy to make decisions, create a plan, and execute, so you can at least have a general idea of what you’ll need later on. Most experts say your retirement income should be about 80% of your final pre-retirement annual income.
2. Create your retirement account
Now that you have your number, it’s time to get to saving! There are a lot of options for retirement accounts for entrepreneurs, and I’m going to break down the 5 most popular:
First there’s the Traditional IRA, or individual retirement account, which anyone can use with income earned from a job or their own business. Your contributions are tax deductible even when you don’t itemize deductions. You also won’t be taxed on investment earnings until you withdraw money, BUT there can be penalties and taxes if you withdraw early. You can open a traditional IRA online through most banks and investment firms.
Then there’s the Roth IRA which is a variation of the traditional IRA. You invest pretax money into a traditional IRA, but with a Roth, you invest income that has already been taxed, meaning that your earnings in your Roth IRA won’t get taxed, even when you begin withdrawing at retirement age. The sooner you can start a Roth IRA the better, but keep in mind that if your income is higher than $139K if you file as a single person or $206K if you file jointly, you can’t make contributions to a Roth IRA.
Third is the SEP-IRA which is good for entrepreneurs who currently run a business on your own but plan to one day have employees. This is actually what I transitioned to from a Roth once my business had grown. A SEP IRA allows your company to contribute to a retirement plan on your behalf, rather than you contributing as an individual. When you have employees, though, you must contribute the same percentage of their pay to their SEP-IRA, as well. So if you contribute 10% of your pay, you have to contribute 10% of theirs, as well, this has actually been awesome for my employees and something I’m super proud to offfer as a CEO.
After a SEP-IRA, you have the Solo 401(k), an employer-sponsored plan that allows you to invest pretax dollars, but you can only open this account if you’re self-employed and have no employees other than your spouse. If you one day do hire employees, you can always convert your solo to a normal 401(k). The biggest advantage to a solo 401(k) is a higher contribution limit. An IRA has an annual limit of $6,000 if you’re under 50, while you can contribute up to $58,000 to a solo 401(k).
Finally, for those entrepreneurs with employees, a normal 401(k) plan is likely the option for you. Unfortunately this option requires the most paperwork as well as a provider fee but with this plan you can set up company matching to bolster your own retirement savings. Keep in mind that whatever you match for your own plan, you need to match the same percentage for all of your employees. This is the most complicated of retirement plans for entrepreneurs, and the most expensive to manage, but it can be beneficial if your business’s revenue and resources can offer a significant match.
3. Diversify your investments
Next up, this one has been huge for us. You want to make sure that as you are investing and saving, you’re not putting all your eggs in one basket, so to speak. Diversifying things like long-term saving, mutual funds, index funds, and exchange-traded funds or EFTs can be a game changer. If you invest in Index funds, you’ll get immediate diversification in hundreds to thousands of stocks and bonds, and this type of investment historically outperforms mutual funds.
I get it, investing is scary and often confusing. If this is a whole new language to you and you know you don’t have time to do a ton of research to fully understand it all, there are options here that allow you to execute without you, yourself, being the expert. Maybe you’d rather set-it-and-forget-it – if that’s you, then you may want to consider target-date funds or robo-advisors. These are services that you can pay a small fee for and they create a pre-mixed retirement portfolio that automatically adjusts your holdings as you get older and the market changes. It looks at your goals, the amount of time you have, and your risk averseness and invests accordingly.
4. Turn on automatic deposits
I’m the queen of automation, those “set it and forget it” infomercials still haunt me in my sleep but this is a tip that can totally transform how you save. I highly recommend setting up as many automatic payments as you can toward your investment and savings goals so that you’re not even seeing that money as it hits your bank account, especially if money tends to burn a hole in your pocket.
When you get into the practice of doing it and setting aside your money, even when you aren’t making a ton, it makes it more of a habit, a practice and a nonnegotiable. It makes it sort of a thoughtless process; you don’t have to spend time and energy logging into your accounts and making sure you’re putting enough in. You can just select the number you want to be investing, make sure it doesn’t go past the limits, and then move on with your life.
And autodrafts or deposits make it so much easier to follow through so that you’re not just waiting and waiting and waiting to get started. Even if you start with $150 a month automatically deposited toward a Roth IRA, that will begin compounding NOW to earn you even more in the future. Remember that decade difference? A decade from now you’ll be so glad you set this up.
5. Put aside any extra cash that you can
Even if you’re not able to put aside 15% of your income yet, you can start small and grow incrementally. Many financial advisors suggest increasing the amount you contribute to your retirement accounts by 1% each year until you reach at LEAST 15% of your income. You can also practice putting aside more when you get a raise or a bonus, or contribute some of your tax refund or other unexpected income you might receive. A few of my team members always just invest their bonuses right when they hit vs spending them or trusting themselves to transfer from their bank account once the bonus hits.
Another thing to be wary of is lifestyle creep or lifestyle inflation. This happens when you begin earning more money and suddenly spending at a higher rate. I literally paid myself the same salary I had earned at that corporate job I quit even when my revenue had more than doubled, because I knew I could live comfortably off of it and so instead I just kept saving and saving. We were able to pay our mortgage off before the age of 30 and have been entirely debt free ever since. So while it’s tempted to inflate your lifestyle as you earn more, heed my warning here and try to live off of less so you can save more.
6. Finally, remember you’re in it for the long haul
This is a marathon, not a sprint. Unless you’re nearing that retirement age of 62 on average, there’s really no reason to fret when the stock market and your investments go through crazy ups and downs. Historically, the stock market sees average returns of around 10%, but some years it’s grown more than 20% and then others, its performance is drastically in the red. Ride the waves knowing that money saved is better than money spent.
Preparing and planning for retirement is a long game, so do what you can to learn more, save as much as you possibly can regularly and starting ASAP, and don’t get hung up on the roller coaster ride of stock market performance. What goes up must come down, and vice versa, but keep your eye on the long game and stay consistent with your strategy and find a team of advisors who support your goals, and you’ll be golden for your golden years.
The Big Picture
What started as a conversation at my parents turned into an episode and while I don’t talk much about financials on here, this is something I wish more entrepreneurs were exposed to and educated in. You chasing your dreams is a big deal and so as you learn and grow, remember that you aren’t the risk, you’re the investment.