It is never too early to start planning for your retirement. Government Social Security only provides a small amount of income, and it will not be enough for most people to retain a comfortable lifestyle after retirement. As a self-employed individual or small business owner, it is your responsibility to take control of your retirement savings.
The amount to save each year depends largely on when you start saving for retirement and how much money you need to have when you retire. As a general rule of thumb, save about 10 percent of your income each year if you start in your early 20s, 15 percent if you start in your late 20s, 20 percent if you start in your early 30s, 25 percent if you start in your late 30s, and at least 30 percent of your income each year if you don’t start until you are older than 40.
Another strategy to use when calculating needed contributions is to estimate how much money you will need each year in retirement, not counting what you get from Social Security. Multiply the result by 20 to find out how much you need to have in your account when you retire. Many websites have calculators to help you determine how much to save each year, given the current balance in your accounts and the number of years remaining until you plan to retire. Retiring later can help you catch up because you have more years to earn and fewer years that you need to save for.
An IRA, which stands for Individual Retirement Arrangement, is one of the best ways to save for your retirement. Plus, if you open a Roth IRA, you pay taxes on your contributions now but get to withdraw money from the account tax-free during retirement. If you don’t plan to save more than $5,000 per year, an individual IRA will work for you. Otherwise, you will need to take advantage of another type of IRA with a higher contribution limit.
SIMPLE IRAs are an option if you are a small business owner with less than 100 employees. Each employee can contribute up to $11,500 per year, plus you as the employer contribute 2 percent of each employee’s wages or match what an employee contributes, up to 3 percent of his salary. SEP IRAs are for self-employed individuals or small business owners and allow your business to contribute up to 25 percent of the first $49,000 you earn each year on your behalf.
If you want to save more each year than the IRA limits allow, you will need to turn to a Solo 401(k). This plan is only an option if you are a small business owner with no employees. You can contribute up to $16,500 per year, plus the business itself can contribute up to 25 percent of your compensation. This is the best type of retirement account to use if you have not been saving much each year and need to catch up now that you have more income.