Harry N. Stout
288- Road to Retirement Options for the Self-Employed
Today we offer a post from a new contributor, Briana Marvell. Briana is a personal finance writer, covering everything from family finances to housing. When she’s not at her desk, she’s hiking Austin trails with her pup or diving into a good book.
Freelancers, business owners, and other self-employed workers all have the same hurdle to overcome — competing with employer-offered benefits. The lack of a 401(k) account and employer contributions especially can make saving for your future difficult to navigate.
While 401(k)s are a popular retirement option, they’re far from the only opportunity to save. Individual retirement accounts (IRAs) are a good starting point, and you don’t have to limit your investments to retirement accounts.
If you’re looking to boost your retirement, consider which of these investments meet your needs.
Individual Retirement Accounts
IRAs are another go-to for retirement planning, and they offer a lot of investment flexibility. There are three core types of IRAs to consider.
Traditional IRAs allow you to contribute up to $6,000 a year, and you can defer your taxes until withdrawal and enjoy tax breaks on your annual contributions.
Roth IRAs also have a $6,000 contribution limit and allow you to invest in stocks, mutual funds, or even cryptocurrency. The big difference between traditional IRAs is that you have the choice to pay your contribution taxes now and withdraw tax-free in retirement. If you expect your income to increase significantly before retirement, this may be the choice for you.
SEP IRAs, or “simplified employee pension” IRAs, are available for self-employed investors. Instead of a dollar-amount limit, you can contribute up to 25 percent of your business earnings, which is a huge benefit when you consider compound interest.
However, if you hire employees, you’re required to offer them the same contribution amount. Consider how many SEP IRA accounts you’ll be responsible for when budgeting your investments.
If you really want the freedom to invest as you see fit, brokerage accounts are the investment for you. You can manage multiple investments with a brokerage account, including stocks, bonds, mutual funds, and more.
There are no contribution limits or age restrictions, and you can shop around for the high-yield investments that make the most sense for you. Since this isn’t a retirement account, you do lose the tax benefits IRAs and 401(k)s offer, and you’re solely responsible for your investments.
If you’re new to investing, it’s a good idea to consult with a financial advisor.
If you’ve ever planned your lottery payout, you’re likely familiar with annuities. Annuities allow you to transfer your contribution into a future income stream. In the case of the lottery, your millions become monthly paychecks.
When you’re planning for retirement, deferred annuities have you covered if you outlive your savings. You make a tax-deferred contribution, then set an age that your annuity will begin payments. This can be your initial retirement age or later to help supplement your savings.
Business Investments and Real Estate
If you pride yourself on your entrepreneurial experience, investing in startups or real estate can be a lucrative opportunity for your nest egg.
Investing in a business can pay off in partial ownership or profit shares, depending on your agreement. It does require a decent amount of disposable income to get started, and there’s no guarantee a business will succeed, so you should know how to properly evaluate the investment.
Similarly, real estate can be a good place to build equity if you have cash or credit available. Owning a home provides the opportunity to make a regular income from long-term or short-term rentals.
If you’re not interested in renting, home values tend to increase year-over-year, so there’s a good chance you’ll get a return on your investment just by owning. Putting money into renovations and amenities can help build value quickly to grow equity you can cash out even sooner.
Diversifying your investments is always a smart move, especially if you’re young and have the flexibility for riskier investments that offer higher returns. At the same time, a few secure and traditional retirement accounts can provide a strong financial foundation as you age.
Understanding your options is the first step to maximizing your investments and enjoying a secure and happy retirement.
Ready to improve the quality of your financial life? Harry is the host of a new podcast from the FinancialVerse where he shares practical ways to relieve money stress and anxiety. Each 7- to 10-minute episode is designed to fit into your busy lifestyle.
Subscribe today or ask Alexa or Siri to play the FinancialVerse.