Most self-employed people would never trade their independence for a 9-to-5 making money for someone else. Self-employment gives you the opportunity to work according to your own rules, setting your own hours and making all the important decisions.
However, there are some downsides. For many, the admin surrounding money is most troubling.
Tax is one issue self-employed people have to deal with alone, but it is another one which is even more pressing. Saving for retirement. People who work for companies get a 401(k), into which their contributions go year-round. Self-employed people need to do it all themselves.
Before we go into the different ways of saving for retirement, let’s take a quick look at how much you should be saving.
What Do You Have Saved?
The amount of money you should have saved for retirement by now depends on your income and your age. By age:
- 30: the equivalent of your annual salary
- 40: three times your annual salary
- 50: six times your annual salary
- 60: eight times your annual salary
- 67: ten times your annual salary. This is the age at which you can start collecting Social Security benefits
If you haven’t saved as much as you should have according to the above figures – or even if you haven’t saved anything at all – the key is to look towards the future rather than feeling regret for the past.
You can start saving right away, and with patience, you will soon have a growing fund available.
Here are the retirement plans you can consider getting for yourself.
Retirement Plans
Solo 401(k)
A Solo 401(k) works similarly to a regular workplace 401(k), except that you are taking the contribution for yourself. Your Solo 401(k) is taxed upon withdrawal, just like a regular 401(k). You can contribute up to $58,000 a year as an employer, and as your own employee, you can contribute again, up to a value of $19,500.
SEP IRA
A Simplified Employee Pension or SEP IRA is an IRA designed for self-employed people specifically designed by the IRS for self-employed people or small business owners. As with a Solo 401(k), you can contribute up to $58,000 or 25% of your annual income.
However, you cannot contribute as both an employer and an employee. As with a Solo 401(k), you pay taxes upon withdrawal.
Traditional and Roth IRAs
A traditional IRA only allows you to contribute up to $6,000 a year but is another option available for self-employed individuals.
A Roth IRA differs in that you pay the contribution post-tax so that your withdrawals are tax-free. You can also leave the money to your heirs, and never have to withdraw during your life if you don’t need to.
These are some of the retirement plans available for self-employed people. But what about other methods of saving for retirement? You don’t have to rely on your retirement plan alone if you do the following.
Invest in an Interest-Bearing Account
If after your retirement annuity contributions you are left with enough money to pay your expenses and still save, invest the extra cash in a fixed interest-bearing account. This way, it will gradually grow, and you know that no matter what happens, you won’t lose your investment.
This is the safest way to grow your savings towards retirement.
Invest in the Stock Market
Alternatively, take the opportunity to invest your extra funds into the stock market. You can spend time learning how to trade online, and it can quickly become a lucrative side hustle. It is also becoming a hobby that millions of people around the world enjoy doing.
You can also trade Forex if you are more interested in the economic and political events which influence the prices of currencies around the world. Since the Forex market is very volatile, you can make a lot of money with day trading.
Invest in Property
Property has proven itself to be one of the best investments time and time again. You can start immediately, renting out the first property you own, before building a portfolio.
While the property will always make you money in normal times, the pandemic has been hard on landlords. Also, house prices in the US are skyrocketing, and you may not be able to afford the same properties today that you would have a year ago.
Saving towards retirement is something you should do throughout your career. It is slightly more complicated when you are self-employed, but there are a number of plans to choose from, as well as extra ways to make money for your future.
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