Running Your Own Business? Don't Forget to Make a Retirement Savings Plan

When you are running your own small business, there are many benefits of being your own boss. You have much more direct control over your work hours and over the kinds of work you do. Your success can directly translate into more money in your bank account rather than just enriching a company's bottom line. And ideally, you can also do work that you love.

But, there are some downsides as well. And one of those downsides is that you are not going to have access to a workplace 401(k). A 401(k) can be the easiest way to save for retirement because you have money automatically taken from your paycheck and your company may match some of your contributions -- but this won't be an option for you if you work for yourself.

As a result, it's absolutely crucial that you make a retirement plan of your own.

Here's why making a retirement plan is so essential

Creating your own retirement plan is vital as a self-employed individual running your own small business because you need to supplement Social Security.

See, Social Security retirement benefits only replace about 40% of pre-retirement income and taking a 60% pay cut isn't feasible to retain anywhere close to your standard of living. You need money to supplement Social Security, and it's up to you to make sure you have it.

When you can't just invest in your employer's 401(k), you need to take control of where your supplementary income is going to come from as a retiree. And that means making a plan as soon as possible when you start your own company, so you have plenty of time for compound interest to work for you and help you build the nest egg you need. 

How can you make a retirement savings plan when you run your own company? 

The good news is, you have options to make a retirement savings plan for yourself -- and potentially for your employees if you will have people working for you at your company.

There are many different retirement plans that are good for entrepreneurs, including plans targeted at sole proprietors as well as small businesses with workers. These plans, which include a SIMPLE IRA, SEP-IRA, or Solo-401(k), can also offer some great tax advantages that allow you to make tax-deductible contributions just like you could if you had a plan through your employer.

You can typically choose which brokerage firm you use to open your retirement plan, although some may charge fees for specific kinds of plans such as a Solo 401(k). You'll want to research the cost of the different plans at your broker of choice, as well as the contribution limits to pick which is right for you. 

You are also eligible for other kinds of plans open to all workers, such as a traditional and Roth IRA. These can be simpler to use, although they'll have lower contributions than Simple IRAs, SEP-IRAs, or Solo 401(k)s.

The important thing is to look into the options available to you and make sure you set up a retirement plan as soon as you start your company. Otherwise, you could find yourself in dire straits as a senior.