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The contractor’s guide to retirement planningJuly 20th, 2021 by
Do you remember the excitement you had when you landed your first contract? That was a rush, huh? Your last contract will come with an excitement all its own, too—if you have a retirement plan in place.
Retirement for self-employed folks, like many contractors, can be a tricky thing. You need to think ahead and plan it for yourself.
In this article, we’ll cover the basics of retirement planning for contractors. We’ll discuss some common obstacles to saving enough for a timely retirement. We’ll also give you some tips for getting started with your retirement planning right now.
What retirement planning is
Retirement planning is all about managing your current income so that you have enough saved to maintain your lifestyle into retirement. The goal is to ensure you don’t have to worry about daily living expenses … or medical costs.
You may also want to take any retirement goals into account. If you’ve always wanted to travel, retirement is the perfect time to start crossing things off your bucket list. But you’ll need the funds to afford jet-setting or any other retirement hobbies you’d like to take on.
You’ll also need enough to handle emergencies and compensate for inflation.
The average American only has $65,000 saved for retirement. – The Motley Fool
What makes retirement planning a challenge for contractors
Building out a retirement plan may be particularly challenging for contractors. That’s because retirement planning is both intimidating and often confusing.
Some of the challenges contractors face may include the following.
1. Choosing the right retirement plan
Full-time employees often have it a little easier when it comes to retirement planning. There’s a good chance they’ll have options to contribute to a 401(K) plan through their employer.
As a contractor who owns a small business, you’ll have to scope out your own retirement plan. Many self-employed folks choose to go with an Individual Retirement Account, more commonly known as an IRA. But IRAs come in several different forms. It’s critical you choose the right one.
You can attempt to do this on your own or you can hire a financial advisor to guide you. Hiring a financial advisor is the better option for most contractors because a financial advisor will have the necessary knowledge and experience to help you make the right choices.
2. Being consistent with contributions
You run a business. Covering day-to-day expenses and operational costs is absolutely a priority. But if you only put money into retirement planning when you have a significant surplus, you may not be saving enough.
And even if you regularly make contributions to your retirement account, it’s important to make consistent contributions. (After all, you want that money to grow over time.)
It’s best if you’re able to consistently make a minimum contribution every month. And if you can contribute more than your target minimum, that’s rarely a bad idea.
How contractors can start saving for retirement now
When it comes to retirement planning, it’s better to start sooner rather than later. But don’t be discouraged. If you’re well into your career and haven’t saved anything yet, you can still start building toward retirement.
But before we get to the tips, a quick disclaimer. We’re not giving financial advice here. This is a high-level guide to point you in the right direction. If you’re serious about setting yourself up for retirement, you need to talk to a professional. We recommend a financial advisor.
Now, on to the tips.
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Prioritize long-term savings
You can’t save for the future without tending to your present-day budget. Your first task is to come up with a budget that has clear guidelines. Your goal should be to carve out some percentage of your income specifically for your retirement savings.
If you’re not sure how to accurately budget, that’s understandable. Especially for contractors. After all, your income may not be consistent month-to-month.
One approach is to estimate your monthly expenses by looking at the last 12 months. Take the total number for a year and divide by 12. This will give you an approximate number for your monthly spending.
Your financial advisor will walk you through a far more thorough process for estimating current expenses and forecasting the necessary retirement savings. But this initial step can help you begin to get an idea of where you are now.
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Take the time to pick the right type of retirement plan
One benefit of being a self-employed contractor is that you can choose any retirement savings plan you want. And you have several options.
Some of these include:
- Traditional IRA
- Roth IRA
- SIMPLE IRA
Your financial advisor can go over these (and more) options with you and help you pick the plan that’s best for you and your family.
Automate the process
An automatic transfer is a good option. Money is deducted from your income and sent to your retirement account on your behalf each month.
An automatic monthly transfer to your retirement account can make the entire process much easier. As an added bonus, those regular transfers will make it much easier to avoid the temptation to overspend and not contribute to your retirement savings.
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Save surplus earnings
Just as there are lean months, there will be good months with an unusually high number of contracts. When that happens, it’s tempting to splurge on yourself rather than saving.
The occasional splurge is no big deal. But in general, it’s best to save the majority of your surplus income rather than spending it as soon as it hits your account.
Hire a financial planner
As we’ve already mentioned, retirement planning is time-consuming and complex. There are a variety of tough choices to make.
Plus, your retirement savings could also affect your taxable income right now.
Rather than taking all that on yourself, we strongly encourage you to hire a professional. That way, you’ll have the assurance that your retirement is in good hands.
The final word
Retirement is a good thing. It’s your time to kick back, relax, and enjoy the success you’ve been building toward for years.
But you can’t get the most out of retirement if you don’t plan ahead for it. That’s why you should start working on your retirement planning now.