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Guide to Retirement Savings

Guide to Retirement Savings

Why is saving for retirement important?

This answer should be pretty self-explanatory, yet we know that 40% of independent workers aren’t saving at all! It’s easy to put retirement savings off, especially since you don’t have a company contributing to a 401(k) for you, but we highly advise you to start putting money away for retirement now. Any amount is better than nothing, and remember, what starts small will be large in 30-40 years.

Considerations when thinking about retirement savings

1. Set a savings goal. Traditional retirement contributions tend to be around 3-6% of your pre-tax income. But if you can afford to put away 10-15% of each paycheck, it will compound more quickly.   

2. Pick a retirement plan type to put your savings into. You can save as much money as you’d like for retirement in a traditional savings account without any tax advantages, but these vehicles help you offset the tax associated with retirement savings. These are the two most common retirement savings options for self-employed workers.

  • The Self-Employed 401(k), aka the solo 401(k). Ideal for people who have no employees (or only employ their spouse). You can contribute pre-tax dollars up to $18,000/year, plus up to 25% of the business’s net earnings, but cannot exceed $53,000/year in contributions. You can also set it up as a Roth 401(k) if you prefer to make non-deductible contributions now and take tax-free withdrawals after retirement. (All the details from the IRS)
  • Traditional IRA and Roth IRA are other tax-advantaged savings vehicles that are separate from your business-sponsored accounts (above). The IRA works by allowing you to contribute upfront saving to the account tax free, but withdrawals in retirement are taxed at ordinary income tax rates. The Roth IRA works by taxing your contributions up front, allowing earnings and withdrawals in retirement to be tax-free. If you’re under the age of 50, the contribution limit is $5,500/year in total, across your Roth and traditional IRAs. If you’re 50 or older, you can contribute $6,500.

There are two other less common retirement savings accounts, the SEP IRA and the SIMPLE IRA. Visit each link to find out more information.

**An important note about all these 401(k) and IRA vehicles: with very few exceptions, any money withdrawn from these accounts prior to age 59½ is subject to being included in gross income for your tax returns, plus a 10 percent (or more) tax penalty. Putting money into these vehicles is a sweet way to avoid taxes; however, make sure you won’t need the money until retirement.

3. Define an investment strategy for your retirement savings. Once you have a tax-advantaged account setup and begin funneling part of each paycheck into it, you have to decide how to invest it. A good investment strategy will determine how much your money compounds over time. This is something you can do yourself, or you can consult an expert.

Places to look for retirement investment help

One of the biggest considerations when looking for retirement investment help is the associated fee with getting professional advice. Paying .25%-1% annually on your investments may not sound like a lot, but it really adds up over the years.

As more technology companies have entered the retirement savings space, there are more low and no-fee options out there, as well as automated investment platforms that eliminate the need for you to figure out a complex investment strategy.

Some places to start:

Large financial organizations: Vanguard, Prudential, Charles Schwab

Retirement specific organizations: Betterment, Wealthfront

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