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Retirement Plan for the Self-Employed

Small businesses make up about 99% of all businesses in the U.S., but only about 35% of those small business owners have a retirement plan in place. Most working Americans can contribute to retirement through an employer sponsored 401k or similar plan. But being self-employed or as a small business owner you are kind of on your own when it comes to setting aside money for retirement.

There’s not one perfect way to plan for retirement. There’s no one size fits all retirement plan. In fact, you don’t even need to use a traditional retirement plan at all.


Retirement Planning Philosophy


This is going to seem like one of those obvious things, but with how complicated things can get, it’s good to take a step back and look at the big picture. So, here’s the grand philosophy for retirement planning.

  1. You need to have money left over from your business expenses to pay yourself (profit)
  2. You need to have money left over from your personal living expenses to invest in your retirement (savings/investments)

Okay, so not that grand and very much oversimplified, but hopefully inciteful. Your business needs to be profitable.

If your business doesn’t generate enough profit to pay yourself, as the owner, a comfortable enough living with some extra to invest, then the best retirement plan you can create for yourself is wasted and does absolutely nothing for you.  

Cash flow management now becomes even more important for your business when creating a retirement plan. The Profit First system is the easiest and best way to set yourself up for successful cash management. Twice a month you’ll take your in-coming money and disperse a certain percentage to each of your Profit First accounts, including your owner’s pay and retirement accounts.

There are a lot of options out there when it comes to retirement plans and financial products. As you research the various options, think about your retirement goals. How do you want to live? How much money do you need to maintain that lifestyle?


Typical Retirement Plans


Let’s go over the main types of retirement plans available.

  • IRA (Individual Retirement Account)
    • Roth IRA – Tax advantage plan where contributions are taxed, but earnings are not.
    • Traditional IRA – Tax advantage plan where contributions are tax deductible.
  • Keogh – Tax deferred plan for self-employed individuals and their employees where the employer contribution is deductible, and the earnings are also deferred.
  • SEP (Simplified Employee Pension) – Tax deferred plan for small businesses where the employer makes annual tax-deductible contributions to each employee’s IRA and the employee does not contribute.
  • 401k – Tax deferred plan through the employer, and still available for the small business owner (or Solo 401k for self-employed with no employees). It is a payroll deduction where the employee chooses a percentage to be deducted and the employer matches to an extent.


Alternative “Retirement” Plans


There are other ways to save for retirement as well. Almost any investment or savings product can be viewed as a retirement plan. Real estate, stock market, crypto, annuities, etc. Anything that’s an asset and can give you income once you stop working.

Really, the best tip I can give you is to see a financial planner. If you don’t know any, I can recommend you to a great one whose office is just across the hall from ours. He’s John’s personal financial planner and he’s awesome to work with.

I can’t tell you which plan to choose. Whatever you decide, make sure you UNDERSTAND it and are COMFORTABLE using it. It really depends on what your specific retirement goals are and what works best for you.


Automate the Heck Out of It


One of the perks of a pre-tax employer sponsored 401k plan is that it’s money that goes directly into your investment account before ever touching your bank account. It’s harder to miss money you never actually had.

Whatever type of investment you choose, make it automatic. Choose something that you can specify a date that it will automatically come out of your personal account, preferably a date that’s close to the date you pay yourself, so you don’t have time to spend it on something else. That way, it’s out of sight, out of mind.

To help you get an edge on your cash flow and jump start your retirement planning, we have a 13 Week Cash Flow Tool you can access for FREE by clicking the button below.


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