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You started your practice to have more control, freedom to choose certain clients (and fire others) and potentially, make more money. Hopefully, all or at least most of these are occurring, but I imagine it’s still challenging to save for retirement while running your practice.
You’re in great company. Across industries, small business owners habitually under save.
Let’s explore why it’s hard to save, how you should be saving and a few of the vehicles you can use to jumpstart your retirement savings.
Before we dive in, note that the following items are presented for educational purposes only. Nothing here is or should be considered specific financial advice for you. As your situation is undoubtedly nuanced, you should seek the advice of financial and tax professionals before utilizing the strategies mentioned.
You have less time. Back when you were an employee of someone else’s firm, things were straightforward. You got paid and a portion of your income was whisked away to your 401(k) account. (If you were lucky, your firm contributed as well.)
And that was it. No watching the corporate bank account. No reconciling books. No paying quarterly estimated taxes. No wondering why clients don’t pay on time.
Now you’re pulled in 100 directions, and running your firm (not actually practicing) usurps countless hours.
No existing plan. This goes with lack of time. You don’t have a retirement plan to plug in to — you must set it up yourself or hire someone to do it for you. Many solos find this to be a surprisingly large hurdle. “I’ll do it next year … ” turns into half a decade quickly.
You see all the money. When you were an employee of someone else’s firm, you likely never saw the firm’s gross revenue and you definitely didn’t have access to the firm’s bank account(s) to watch client payments actually being deposited. But now, you see everything. Daily, weekly, or monthly, you see each incoming client dollar.
What’s wrong with this?
Once seen, those dollars “without a plan” cannot be easily unseen and squirreled away in a retirement account that you won’t be able to access for multiple decades. So, those dollars end up in one of the two places: (1) back in the business and/or (2) your personal bank account.
Automate your savings and pay yourself first. If you’re receiving a regular paycheck from your firm (even if you’re self-employed) carve out a portion for retirement savings and think of it as a regular “expense” that must be paid.
If you prefer to make an annual profit-sharing contribution, build that contribution into your firm’s 12-month financial forecast. When you put parameters around retirement savings goals, they have a higher probability of occurring.
Solo 401(k)s work well for solo practitioners who are self-employed and do not have any employees other than a spouse. Lesser-known fact: a solo 401(k) may also be used for a partner/owner-only business with no employees. A solo 401(k) recognizes you as both the business owner (the employer) and the employee.
Don’t use a SIMPLE IRA for your practice.
Yes, they’re simple to set up (pun intended) and inexpensive. However, the contribution limits are much lower, $12,500 (for 2018) and $15,500 if age 50 or older, compared to SEP-IRAs and 401(k)s. This hurts you and your employees. Also, as the employer, you’re forced to contribute following one of a few available methods.
If you have eligible employees and don’t want to use a SEP-IRA, consider setting up a 401(k) plan. There are a variety of small business or “startup” 401(k) vendors with very cost-competitive offerings.
Fidelity, Schwab and TD Ameritrade have good summaries of small business retirement plans. Additionally, Ida O. Abbott’s recent article, “Prepare Yourself for a Happy Retirement,” discusses retirement planning from a different, yet pertinent angle.
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