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There are many reasons for choosing self-employment, including greater flexibility or income potential, but one of the most common downsides is the lack of an employer-sponsored retirement plan. Unlike an employee that has a 401(k) or pension plan, self-employed individuals are on their own to save for retirement.
Let’s take a look at some of the best ways for self-employed individuals to save for retirement.
Be sure to check out the Retirement Channel to learn more about retirement planning concepts and strategies.
The amount that you need to save for retirement also depends on the withdrawal strategy that you use and whether you want to leave money to heirs. For instance, some financial advisors recommend that you draw down four percent each year in retirement, but that amount depends on your projected lifespan and the amount you want to leave your loved ones.
Once you know how much you need in retirement, you can work backwards to determine how much you need to save each month right now to achieve the desired goal. These calculations involve making some assumptions, such as the average rate of return, inflation rates, and rates of return in retirement with a conservative portfolio, among other things.
The most popular accounts include:
The right choice depends on your specific circumstances. For example, gig workers may want to use traditional and Roth IRAs since they’re the simplest accounts, whereas high-earning self-employed individuals may want to consider a solo 401(k) to save more than IRAs allow. SIMPLE IRAs, on the other hand, are a good option if you have a few employees.
Since many self-employed people are self-insured, Health Savings Accounts, or HSAs, are another important type of account to consider. These are savings and investment accounts that are intended to help cover qualified medical expenses for high-deductible plans, but they can also be helpful for saving money in a tax-advantaged way beyond an IRA or 401(k).
Robo-advisors have also found a middle ground in helping customize portfolios at a lower cost than a human advisor.
If you’re building your own portfolio, the single most important decision to make is choosing the right asset allocation. According to Vanguard, 88% of the volatility that you encounter and the returns that you earn can be traced back to asset allocation. Your experience will be very consistent with other diversified investors with the same asset allocation as you.
As you approach retirement, you will need to convert your investment portfolio into income by either selling assets, investing in income-generating assets, or oftentimes both. When it comes to income-generating assets, you can choose between conventional fixed income investments, dividend paying stocks or MLPs and other structures.
Don’t forget to explore our Portfolio Management channel to learn about different ways to rebalance your portfolio.
Be sure to check out MutualFunds.com’s News section for next week’s trending news.