First Steps to Save for Retirement for Entrepreneurs

If you’re an entrepreneur, you know the importance of saving money. Everyone should follow specific steps to save and maximize their assets before retirement. There are small things you can do when you’re young that can have a significant impact on your finances later in life. In this article, we’ll go over some of the critical first steps you should take to start saving money.

Key Takeaways

• Creating a budget is one of the most essential steps to saving money. Categorizing your spending into essentials and recreational purchases can be eye-opening about how you use your money.
• The process of opening a retirement account takes some research beforehand. Learn the differences between a traditional IRA and 401(k), particularly how they’re taxed.
• Automating your savings saves you time and ensures you continually add money to your retirement account.

Set Financial Goals

The first step you should take when planning to save money for retirement is outlining your goals and timeline.

How old are you? If you’re in your teens or early 20s, you should first pat yourself on the back for being so financially responsible at a young age. You’ve got a long time horizon, meaning you can make riskier investment decisions (investing in stocks, for example) that will hopefully give you an excellent yield over time.

If you want to retire young and move into a house in Beverly Hills, you must adjust your saving and spending habits to be a bit more stringent. If you don’t mind working until you’re closer to 60 or 70 and want to live in the woods in a small cabin, your saving habits can have more breathing room.

Specific goals will help you create a savings plan tailored to your needs. Your goal shouldn’t be as abstract as “I want to be rich and retire early.” Get specific with your numbers. Research how much your dream house costs right now.

Even though inflation will push the price of the home higher by the time you’re ready to buy it, having the specific number will help you make more concrete plans.

Create a Budget

Next, you should develop a comprehensive budget outlining your income, expenses, and savings targets. This could be as simple as printing out a copy of your debit card history and going through all your purchases in the most recent month.

Since you’re an entrepreneur, try to be mindful of both your personal and business expenses, keeping track of how much money you’re directing into your company. Looking at your transaction history can be eye-opening for many of us, as it forces us to consider what we spend on regularly and maybe what we spend too much on.

Dividing transactions into essential purchases and inessential purchases is another way of gauging your minimum monthly budget (the lowest amount of money you need to survive comfortably).

That “comfortably” is ambiguous enough to cover a wide range of spending habits. The point is not to spend as little as possible but to know how much money you want to spend each month. This will help you better allocate funds toward retirement savings.

When picking a goal, it’s crucial to have a specific number and a specific timeline in mind. It can be challenging to choose that number if you’re young and aren’t totally sure where you hope to be at retirement age. In that case, picking a specific number can still be helpful as it will force you to be more mindful of your spending habits and progress toward your goals.

Establish an Emergency Fund

Less than half of people in the US say they’d be able to cover an unexpected $1,000 expense. This is alarming and should make the need for an emergency fund clear.

As an entrepreneur, it’s important to have a safety net to cover unexpected expenses and business setbacks. It’s almost guaranteed there will be months you perform worse than expected, face fees or licensing costs, or need to invest more to keep up with the competition.

Set aside a portion of your income to build an emergency fund that can cover at least three to six months’ worth of living expenses. That way, no matter what happens, you’ll give yourself breathing room to adjust and take actions to get back on track.

Having this fund in place will prevent you from dipping into your retirement savings during challenging times.

Open a Retirement Account

The next thing you should do is research different retirement account options available to entrepreneurs, such as a Simplified Employee Pension Individual Retirement Account (SEP IRA), a Solo 401(k), or a Simplified Employee Pension Plan (SEP).

An SEP IRA is like a traditional IRA that can receive employer contributions. One benefit of an SEP IRA compared to a traditional IRA is that the annual contribution limit is much higher on the former. SEP IRAs typically have lower administrative costs as well, and they only come in pretax versions.

A solo 401(k) is traditionally funded with pretax money, meaning contributions are made before municipal and federal taxes are withheld. However, you can also set-up a Roth solo 401(k) funded with after-tax contributions. Solo 401(k)s often allow you to save money at a faster rate, making them a good option for single entrepreneurs.

Choose the account that best suits your business structure and financial situation, and open it as soon as possible to start accumulating tax-advantaged retirement savings.

Automate Your Savings

Be sure to take advantage of automation tools provided by your bank or retirement account provider. Automation tools can move money directly from a deposit into a savings account, ensuring you consistently save money.

Set up automatic transfers or contributions from your business earnings to your retirement account. By automating your savings, you’ll ensure consistency and make it easier to stay on track with your retirement goals.

Most bank accounts offer some form of automated transfer at this point, and if you’re unsure whether your bank does, you can always visit their website or call an agent to ask.

Many financial advisors say 20% of your paycheck should go toward savings, with 50% going toward necessities and the remaining 30% going toward discretionary items. If you make $5,000 per month, that means $2,500 should be going toward essentials, $1,500 can go toward discretionary items, and the remaining $1,000 should be automatically deposited into savings.

Maximize Contributions

Retirement accounts come with certain limits to how much you can deposit into them each year. This ensures that higher-paying workers can’t take advantage of certain tax advantages.

It’s usually a good idea to contribute the maximum allowable amount to your retirement account each year. Consult with a financial advisor to understand the contribution limits and tax benefits associated with your chosen retirement account.

By maximizing your contributions, you’ll benefit from tax advantages and potentially grow your retirement savings faster.

Diversify Your Investments

Once you have funds in your retirement account, diversify your investments to manage risk effectively. Consult with a financial advisor or investment professional to develop a diversified portfolio that aligns with your risk tolerance and long-term goals.

Remember to rearrange your portfolio as you age to ensure you’re protecting assets when you need them more. This is known as rebalancing your asset mix. Having a majority of your money invested in stocks or a speculative asset like crypto isn’t as smart the older you get. You’ll want to look into products like deposit certificates and treasury securities with lower risk.

In today’s artificial intelligence world, more AI-assisted investing products can help rearrange your portfolio automatically to respond to current events. Watching stock movement every day isn’t feasible for many people, so taking advantage of new technology may be an intelligent choice for you.

Regularly review and rebalance your portfolio as needed to ensure it remains in line with your retirement objectives.

Remember that certain investments are better to make depending on the state of the economy. Many economists are predicting the US will enter a recession later in 2023. During a recession, utility companies, discount retail stores, and grocery stores tend to be better investments, since they’re essential services people will continue to spend money on even when times are tough.

The Bottom Line

Entrepreneurs should take specific steps to protect their money and prepare for retirement. Some of these steps include making a budget, tracking your spending habits, setting up a retirement account and automatic contributions, maximizing your contributions, and diversifying your portfolio regularly.

We’re living in a year of exceptionally high inflation and economic uncertainty. With many people unable to build a robust emergency fund or make regular contributions to a retirement account, the need to start taking these steps early in life has never been more apparent.

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