Why You Need A Plan For Retirement As A Business Owner
Have you ever told yourself that you’re just not a ‘numbers person’? I hear this so much from my clients! As an entrepreneur, there’s always something more time-sensitive (and, to be honest, something easier) than retirement planning. It’s tempting to get so caught up in the day-to-day of being boss that you put off thinking and planning for the future. It’s overwhelming – even the phrase ‘retirement’ can bring confusion, panic, and uncertainty.
Perhaps due to that overwhelm, only 13% of self-employed people are currently saving for retirement. That’s just a little more than one in ten! While we might be building our dream jobs and businesses, very few of us want to keep up this work at this pace until our deathbeds. For me, the biggest allure of entrepreneurship when I started my business (over a decade ago) was freedom. I craved freedom from a boss, freedom from an office, and freedom from a schedule. With that accomplished, now I’m thinking about what freedom looks like to me in ten, twenty, thirty, and forty years. And that’s what retirement planning is all about – planning for more freedom in your life, work, and finances. So how do we get started?
Define your end game – and how much money that will take.
What does retirement – or more freedom – look like to you? Are you spending time with family, volunteering, gardening, or traveling the country in an RV?
You don’t need to decide if you’ll work forty (or, let’s be real, sixty) hours a week for a certain number of years and then quit cold turkey. That’s not really how we bosses roll. I plan to work nearly full-time for fifteen more years in my retirement plan. When I hit 46, my son will have graduated high school, and I’ll be ready to have the ability to travel with my husband. Meaning I might want to work some, but I don’t want to be required to work at all.
That’s what retirement planning is all about – planning
for more freedom in your life, work, and finances.
Cash flow for this stage of life can come in many way. The most common being earnings on stock market investments, real estate properties, and keeping your business going under different management (or selling it). I love diversity (because, to me, diversity is security) and plan to do a mixture of these.
I go by the 4% rule. An investing term that means you can conservatively draw down 4% from your stock market investments per year without touching the principal. To put that in perspective, if you have one million dollars in the market at retirement, you can count on spending $40,000 a year without touching that million. Now, a million sounds like a lot, doesn’t it? Let’s talk about how you can get there.
Choose a retirement plan that best fits your needs.
The first must-have retirement account is a Roth IRA. Unlike a traditional IRA, a Roth is taxed as you earn. That means you can’t deduct your contribution now, but you won’t pay taxes later (including its growth). Roth IRAs are also flexible. You can withdraw your contributions (I don’t recommend this, but it’s good to know!) without incurring taxes or penalties after you’ve had the account for five years.
The maximum you can put into a Roth IRA every year is $6,000 as of 2022. You can spread that out monthly, quarterly, or do what I do and write the full check in January. A quick and important note: if you’re making more than $144,000 in profit a year (damn, get it!), you won’t be eligible for a Roth IRA. In that case, you’ll want to set up an individual 401(k).
You can open up these accounts at Vanguard (where I keep my stash) or Fidelity. (Stay away from places like Edward Jones and Northwestern Mutual that somewhat dishonestly boast the benefits of actively managed funds – but that’s another article!) If you’re interested in a more hands-off roboadvisor approach, check out Betterment.
Invest, automate, and keep setting those goals.
Once you open these accounts and transfer some money, you have one more (very important) step! You need to choose investment funds for your money to go in. So many people open up Roth IRAs, max them out, and then realize years later that they never actually clicked “invest”. So their money didn’t grow. Ouch! I want to keep you from that!
It may sound fun to buy a stock of this and a stock of that trying to find the next Tesla or Amazon, but that is not my recommended strategy (for your money OR for your time!). Investing in index funds is the best way to diversify and keep your portfolio growing.
You can safely assume the money you
invest will double every seven years.
An index fund (created in the 1970s by my financial crush, Jack Bogle) tracks and purchases stocks from all companies in an index (like the S&P 500, the 500 largest US companies). Therefore mimicking the market, not trying to beat it. You, as an investor, are buying percentages of all those companies with your index fund stocks. Due to this diverse portfolio, they’re an amazingly low-risk and passive option that even Warren Buffet endorses (what’s good enough for Mr. Buffet is good enough for me). I have 100% of my retirement money invested in index funds – which means I’m invested in hundreds of companies!
While there’s no minimum to start your Roth IRA, there are often minimums to invest in index funds (around $1,000). So keep that in mind as you begin actively purchasing shares. You don’t need to pick a dozen index funds – start with one or two.
Through the true magic of compound interest, the sooner current you begins investing in the market, the more prosperous future you will be. You can safely assume the money you invest will double every seven years. So literally, every year makes a huge difference! I love using this investor calculator to see how much the money I invest today will grow in the next few decades.
Start Saving For Retirement Today
I’ll end with my most important piece of advice: just get started.
Don’t let perfectionism keep you from investing until you can max out (I made that mistake) or fear of the unknown keep you from selecting an index fund. Open the account, create an automatic monthly withdrawal for whatever you can squeeze into your budget (even if it’s just $50 a month), invest in a couple of index funds, and then sit back and watch.
With just those steps complete, you’re officially in the top 10% of fellow bosses. I’m cheering you on! Let’s get rich. Check out the Money Resources Page for video, podcast episodes and articles for even more support around money.