Some tips on retirement planning for pandemic entrepreneurs
Life has changed and many have changed their minds with it. Careers have been one of the biggest changes – what they can offer, what’s important to you, and what career it will take for you to live the life you want.
During the pandemic, many “pandemic entrepreneurs” realized the desire for more flexibility in their lives and decided to start their own businesses.
According to Prudential’s Pulse of the American Worker Survey conducted this year, “1 in 5 workers has completely changed jobs in the past year,” and they did so in search of a better job. work-life balance, better pay and the desire to try something new.
A Salesforce article noted, “According to the Census Bureau, more than 4.4 million new businesses were created in the United States in 2020 – the highest total on record. As a benchmark, this is an increase of 24.3% from 2019 and 51% above the 2010-19 average. (www.salesforce.com/blog/small-business-pandemic-entrepreneurs)
New entrepreneurs may have been drawn to being in control of their own time, their own destiny, their working hours, and work-life balance. Maybe they always wanted to solve a problem and now seemed like a good time to start, or they wanted to use their creativity to start a business. They’ve probably thought about the impact their business has on their time, their current lifestyle, and their cash flow.
Besides lifestyle considerations, there are also new financial considerations such as setting your budget, owning your own salary, factoring in costs you don’t think about such as covering the full amount of FICA tax or the financing of all of your health coverage.
They might not have been the first thing that comes to mind when starting a business, but these topics come up quickly and so do the costs associated with them.
What you probably haven’t thought about as much is how becoming an entrepreneur creates the burden of being fully responsible for your financial future, especially your “retirement fish.”
There is no longer a retirement plan set up for you by your employer that you can easily fund each paycheck, and maybe even earn some extra money that they match on your behalf. Now you’re tasked with understanding the types of plans, putting them in place for your business (and your employees), and funding the account for your future.
With this responsibility comes flexibility: you can choose the right type of plan for your situation, assuming you want to save more than what is allowed in an Individual Retirement Account (IRA).
What you don’t want to do is ignore your future, pretending that you are currently starting a business. It’s too easy to put this off until later if you don’t start your new business on the right financial footing for all aspects of your life.
So what are some of the common options for a small business owner? Remember that these rules and values can change every year.
▪ Simplified Employee Retirement (SEP) IRA
With a relatively easy setup, relatively low fees, and relatively straightforward rules, this could be an attractive option. You can contribute up to 25% of your earnings, with a cap of $ 58,000 in 2021. A SEP may be preferable if you plan to remain your only employee or if you are open to other options if you hire employees. additional.
Employers who set up a SEP IRA are required to pay the same percentage into each employee’s account, including theirs as the owner. Therefore, this plan can become expensive if you plan to add additional people to your team in the future.
▪ Employee Savings Incentive Plan (SIMPLE) IRA
Additional rules and tight investment caps make this more attractive to those who will hire employees. This account can grow with your business and limit employer contributions compared to the SEP IRA. The 2021 contribution limit is $ 13,500, unless you are eligible for catch-up contributions.
▪ Individual 401 (k)
This plan is available to sole proprietorships – and spouses who work in the business can also contribute. This can be a great way to save big amounts, as the 2021 limits are 25% of your compensation plus your employee’s contribution, with a maximum of $ 58,000.
If you’ve started or are thinking about a business, make sure that a retirement plan is factored in and that you make retirement a priority while growing your business.
Marc C. Shaffer is a CERTIFIED FINANCIAL PLANNER and a member of the Financial Planning Association of Greater Kansas City. Shaffer is a principal of Searcy Financial Services, Inc., a fee-only investment advisory and financial planning firm located in Overland Park.