How old do you have to be to start thinking about planning for your retirement? It’s never too early, but when is it too late? Even later in life there are a number of ways to prepare for retirement, but what if you’re self-employed? You may be surprised to hear that you have many similar options as those who are employed by others.
When Can You Retire?
There are a few things to consider in order to figure out when you might be ready to retire. Remember, even if you have a pension, after social security, most of your income will come from savings and investments, including property rental. Knowing what your resources are now and will be in the future is a good place to start when figuring out a retirement target date. Here is a checklist of factors to keep in mind when calculating your possible retirement timeline:
√Regular expenses after retirement
Determine your possible expenses after you retire. You’ll have some of the same costs as when you worked, such as groceries, food and shelter, as well as gifts or family financial help, vacations and entertainment.
√Expenses that may go down
No payroll taxes, retirement savings contributions, gas, mileage and work clothes.
Consider your current health needs and possible future needs. Make sure you are able to afford a decent health insurance plan. The best time to shop for long-term care insurance is before you hit age 59 (when premiums will go up.)
If you don’t already have a plan to pay off debts, including loans and a mortgage, you need to factor this in. Ideally, you want to be out of debt before retirement.
You can start collecting social security at age 62, and your choices will affect how much and when you are paid. Waiting until you are age 70 will yield a maximum monthly benefit. Alternately, if you are still working when you reach full retirement age (usually 66 or 67), you may want to consider collecting your monthly benefit and investing it while you are still earning and not dependent on the additional income for meeting your basic living expenses. Ask your financial advisor or tax consultant for guidance on your particular situation.
√Savings and passive incomeWhile it’s always good to start saving and investing early, there is plenty you can do in your forties, fifties, and even sixties. You should certainly be thinking about your retirement plan at least five to ten years before you might retire. And ultimately, it’s always “better late than never” to arrange some type of income to supplement your savings.
Self-Employed Retirement Considerations
Without a company plan to guide you, you must make individual choices regarding your retirement plan. This begins with determining your personal goals and then forming your plan to accomplish them in the time frame you have.
- Simplified Employee Pension – Contribute up to 25% of your net income from self-employment.
- 401(k) plan – Also known as a “solo IRA plan,” the self-employed 401K plan has different limits for those over age 50.
- SIMPLE IRA Plan – Also known as a “Savings Incentive Plan for Employees,” gives higher limits to annual contributions, which also differ for those over age 50.
- Defined benefit plans – Choices range from a traditional pension plan, to other types of cash benefits based on salary and other contributor details.
The IRS outlines these retirement choices for the self-employed, in more detail.
Self-employed workers don’t have to go it alone in planning their retirement. Charles Myrick and the professionals at Myrick CPA can make it easier to understand your choices and help create a retirement plan that addresses all of your needs and goals.