Self-employment can seem like a boss-free dream come true. That is, of course, until you discover the horrors of self-employment taxes, the challenges of paying for your own health insurance, and the difficulties of saving for retirement without an employer-sponsored retirement plan.
Self-employment doesn’t have to mean working till you drop. But it does require more planning, diligence, and discipline than traditional employment, particularly if you hope to retire on time or early. Here are five strategies to cross the retirement finish line.
Decide Whether You Can Really Afford Self-Employment
Self-employment isn’t for everyone, and its costs can be deceptive. You need to do more than just ensure you can make enough to fund your lifestyle or replace your previous income. Instead, to truly exceed at self-employment, you must actually make more than you made as an employee. Work with a personal finance advisor to explore:
- The additional costs of self-employment, such as supplies, advertising, and health insurance.
- How to account for income insecurity. Most self-employed people don’t have regular incomes. They have times of feast and famine, which means you must have money set aside and a plan for when times are tight.
- Whether you can afford the additional taxes associated with self-employment.
- Whether you can afford to save for retirement on a self-employed salary.
- Whether you can afford to buy a home while self-employed. In retirement, your home will likely be your most valuable asset. It can also offer access to fast cash in the form of a sale, or a reverse mortgage. The latter offers you money that, as long as you follow the terms of the loan, you won’t have to repay while you live in your home.
If you’re not sure about any of these, then now is not the time to become self-employed. Instead, consider working a side gig until you make enough to quit your day job. Then revisit the issue again in a year or so.
Work With an Accountant to Structure Your Business the Right Way
The right business structure can substantially reduce self-employment taxes, but every business is different. Work with an accountant who’s familiar with your market sector to structure your business in a way that minimizes taxes and other expenses. Once you’ve reeled in the costs of self-employment taxes, double the savings by putting the money you would have paid the tax man into a retirement account.
Put Away All the Money You Save
Self-employment can be costly, but it also often comes with some significant cost savings—particularly if you work from home. Take a hard look at whether and to what extent self-employment is saving you anything. Then put that money toward retirement, no matter how small the figure. Even $5 saved per week adds up over the lifetime of a career. Some common sources of savings include:
- Having to buy fewer business clothes.
- A shorter commute, or no commute at all.
- Not having to decorate or furnish an office.
- Not having to pay for lunch breaks or snacks from a vending machine.
- Less wasted time; put a dollar amount on the time savings, and bank it.
Invest in Your Own Retirement Plan
Without an employer-sponsored plan, you’ll need to double down on retirement savings early. The earlier you start, the better. Work with a financial planner to determine the right retirement plan for your needs, and sock away as much money as you can. Then meet on a regular basis—annually or even more frequently—with your advisor to ensure that your strategy is still working.
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