Saving for retirement when you are self-employed.
Bansir was a talented chariot builder in ancient Babylonia who had a modern-day problem.
At the end of every year, no matter how hard he worked, Bansir never seemed to have enough money. This was all the more frustrating given that his childhood friend Arkad had grown very wealthy, even though Arkad worked no harder than Bansir.
Bansir had to know what Arkad did differently, and so he asked his friend for his secret.
Arkad told Bansir that it was actually very simple. What he did, he told his friend, was pay himself first. As explained in the classic book on wealth creation, The Richest Man in Babylon, Arkad told his pal that the secret he had learned was this: Before he paid his bills, before he bought food, paid rent, or anything else, he socked away 10% of his income.
“I found the road to wealth,” he said, “when I decided that a part of all I earned was mine to keep.”
As a small business owner, saving money, especially for retirement, can be challenging. According to Forbes, 70% of the self-employed in America do not save regularly for retirement, and almost a quarter are not saving at all.
A disturbing statistic, that.
Why is it so difficult for a small business person to save for retirement? Part of the reason is that it is all up to you – there is no employer matching your savings or making it easy for you by withholding funds from your paycheck. And, while that is certainly part of it, the main reason is mostly the same reasons that Bansir didn’t do it all those years ago – he hadn’t gotten into the habit of saving.
The good news is that implementing the 10% rule is a lot easier than you think (and certainly, your 65-year-old self will thank you for getting into the habit.)
One good way to start is simply by setting up an auto-transfer system with your bank, automatically transferring money out of your checking account and into your savings account every month. By doing this, the saving will hardly be noticeable and, equally importantly, you won’t be able to talk yourself out of it.
Another strategy that works for some people is to find a “finance accountability partner.” The idea here is to have someone to whom you are accountable every month for making, hitting, and sharing your financial goals. In turn, you do the same for them. Being accountable to someone besides yourself works, and before you know it, you will have created a viable plan of action that helps you save for retirement.
The next step in this process is the fun stuff. Once you have nailed down, through whatever means necessary, a way to save, then you need to figure out which sort of retirement plan is best for you to invest in.
Here are your options, starting with the most common. We suggest that you follow up with a New York Life insurance agent to learn more.
Simple IRA: An Individual Retirement Account is quite easy to set up and requires little paper work. Often, an employer will match (up to a certain percentage) the contribution made by an employee.
SEP IRA: A Simplified Employee Pension Plan, or SEP IRA, is also easy to create and maintain. SEP IRAs allow higher contribution levels than Simple IRAs.
Solo 401(k) Plan: This 401(k) plan works just like a 401(k) that you would have if you worked for someone else, except that, as both the employee and the employer, you can potentially contribute more than you could if you were just an employee.
Annuities: An annuity is an investment that converts your principal investment into periodic payments that can last for life. These plans do not have to meet ERISA requirements or be offered to all employees and they also have no contribution limit, allowing you to put more away for retirement, though access to the money funding an annuity is more limited than some of the other options.
A Keogh: Another option, depending upon your financial situation, is a Keogh, but note, these have largely been replaced by SEP IRAs and are complicated to set up.
Yes, of course, you may feel like you want to hold on to the money you have to use now, but it is important to think big, and long-term. That’s what Arkad did. Indeed, with any of these options, the thing to remember is that advice that Arkad gave to Bansir: Pay yourself first. If you do that, you might just become the richest person in Babylon too.