While there are many benefits to being self-employed, one of the often overlooked challenges is that you are completely on your own for retirement planning. We don’t have a pension, we have no employer sponsored benefits plan, and generally photography businesses are tied directly to the artist so this isn’t a business you can usually build up to sell as part of your exit strategy.
I’m a bit of a personal finance nerd. I read Money magazine the day it arrives cover to cover and I listen to Dave Ramsey and Suze Orman podcasts in the car. Naturally, when I heard about a great new personal finance book I ordered it on Amazon immediately, Master the Game by Tony Robbins. You may have the reaction my husband did when you hear who wrote this book, “Tony Robbins is a total cheeseball.” Tony built his career as a motivational speaker and people either love him or hate him, but this book is meaty. It is full of details and fact with just enough motivation sprinkled in….because it is still Tony Robbins!
The sheds light on the myth that mutual funds are the best way to save for retirement, when in fact they rarely beat the market. It was eye opening to see how the investment industry really works. For instance, let’s say that investment house A opens 5 new funds. At the end of the year only 1 of those 5 funds has outperformed the market, so the other 4 funds are absolved and rolled into that “good” fund. As soon as that fund no longer beats the market it is rolled into another better performing fund! The numbers that you see “90% of our funds beat the Lipper Average” are not even close to accurate!
The one thing that I learned in my college statistics class is that you can make the numbers say ANYTHING depending on how you compile them. This is no different.
The book offers calculators to determine how much money you will actually need to save to reach different levels of financial freedom, or that point when you can live off of the money that your money is making. The book outlines different investments and gives you great recommendations from some of the top financial minds in the world today. Do you know where Warren Buffett money is going when he dies? Straight index funds from Vanguard, one of the only NON-PROFIT brokerage houses.
Think about it, how you are possibly making the best return on your money when the brokerage house that you are using needs to make money off of YOU to pay their shareholders?!?!
We are responsible for our own future. I know a goal in my life is to have financial security, this doesn’t mean I want to be the next Warren Buffett, but I do want to have enough money in the bank that I don’t have to stress about paying my mortgage or being able to retire one day.
Here are some great vehicles for your retirement investing (at least for our US readers as tax laws vary greatly in other countries…)….
Roth IRA – This is funded with post-tax dollars, meaning that you pay taxes on the money you put in now…..BUT….the money grows completely tax free and is tax free upon withdrawl. Hurry up and take advantage of this before the federal government decides that there is a huge amount of money sitting there that they aren’t getting a piece of.
Contribution limits for 2015 are $5,500 per year if you have an adjusted gross income of $116,000 or less as a single filer, or $183,000 or less if you are married filing jointly. If your adjusted gross income is greater then those limits…that’s great! While you can’t directly contribute to a Roth, you can still contribute $5,500 a year to a Traditional IRA and then convert it to a Roth (and pay applicable taxes) to get all of the same benefits.
SEP IRA – This is funded with pre-tax dollars, like a 401(k) for the self-employed. That means that any money that you put in now will be deducted against your income so it can lower your current tax bill. There is no such thing as a free lunch though, so you do have to pay taxes on all of the money, including the earned capital, when you take distributions in retirement. There are also mandatory distributions that begin at age 70 ½, whereas a Roth IRA has no mandatory distributions ever!
A SEP IRA was specifically created for small businesses and it has some terrific contribution limits. You can contribute the lesser of; 25% of your compensation or $53,000 for 2015.
Deciding which account is best for you is something that you may wish to discuss with your accountant as it will vary for different tax situations, but for most situations you can’t beat the Roth IRA.
In the meantime, earning enough money to save for your retirement will never be possible if you aren’t priced appropriately…..