When you’re heading up your own small business, your financial future is in your hands. It’s easy to get caught up in the day-to-day financial needs of the business, but don’t forget your own future! How much do you need to save for a comfortable retirement?
The short answer: It depends. It depends on your lifestyle, age of planned retirement, health challenges, and your projected income stream at the age of retirement, as well as other factors.
While there’s no way to predict the future and prepare for all the unknowns, there are some tools, tips, and resources available to help you plan for your retirement future. Here are some simple ways to help you determine how much to save for retirement and ways to get there.
1. Think Hard About Your Future Plans
One huge challenge all small business owners face when saving for retirement is the specter of the unknown. You can’t predict how long you’ll live, whether you’ll face financial challenges or medical issues, or any number of other factors. So, you’re working with an educated guess. You don’t want to set aside so much that it hobbles your life and business growth today, but you certainly don’t want to run short once you’re retired.
To make your educated guess, start thinking about what your retirement is going to look like. Do you expect to work for as long as possible or retire early? Will you downsize your home, retire somewhere with a lower cost of living, or buy a vacation home? Will you be supporting a spouse or other family member? Will you have alternative sources of income such as an investment account?
Consider also what you want to do in your retirement. For example, maybe you’ll want to travel. Maybe you’ll want to take up sailing or golf. All of those hobbies cost money and you’ll need to make sure you have enough on hand. On the other hand, you may want to take up part time work doing something you enjoy – teaching a class or two at your local college, for example. Then you can factor that additional income into your plans.
With that information, you can start to get a ballpark estimate for how much money you’ll need once you leave the office behind.
2. Save, Save, Save
Once you have an idea of how much money you want to have in the bank in order to retire, it’s time to look at how you’re going to reach that goal.
The general rule of thumb for retirement savings from industry pros is to start early and be aggressive. Save as much as you, as soon as you can. Financial planners recommend that you start saving for retirement as soon as you start earning a steady paycheck. The ideal goal is to start saving for your retirement in your 20s. Some financial planners say that you should start saving 10% to 15% of your income for retirement as soon as you land your first full-time job.
Don’t despair if you missed that deadline – it’s never too late to start. No matter what your current age, there’s still time to evaluate your retirement goals and to put together a working plan toward financing your future. If you need help trying to manage these complex plans, then working with a certified financial planner can help you assess your current financial heath and assist you in making a plan for the future.
3. Let Your Money Grow On Its Own
Starting to save early is not just about getting more dollars in the bank. It’s also a matter of growth. For example, let’s say you put $5,000 into the stock market today and you earn a 12% return. In 10 years, that $5,000 will have turned into more than $15,000! Getting a 12% return generally requires stock market investment. That’s riskier than certain other kinds of investments. However, that’s another benefit of starting young – you can afford to take a little bit riskier investment because there’s plenty of time for things to turn around before you need the cash.
If you’re more risk-averse, consider investing in mutual funds. Mutual funds are considered a fairly safe way to save for retirement, and they provide more growth than a traditional savings account would. Investments inherently have some level of risk, but if you start out with lower risk ventures, like mutual funds, then you’re balancing that risk in a conservative way.
So how do mutual funds work? Instead of investing in a single stock, you invest in a fund made up of lots of different investments. The returns are usually lower than investment in the open stock market, but that’s because the risks are lower.
Starting your own investment portfolio can be a little overwhelming. This is another area where a financial planner can be really helpful for evaluating investment prospects that align with your future retirement needs. They can help you put together a portfolio of stocks, bonds, mutual funds, savings accounts, and cash that balances your needs for growth with your preferences for risk.
4. Use Tools and Resources to Help
Many DIY resources exist online to help you visualize exactly how much you need to save and plan for. Online tools can provide a clear picture of the consequences of each of your financial choices. Retirement calculators won’t stand in for one-on-one pro financial advisor advice, but they can provide you with an accessible way to forecast the outcome of different savings plans.
NerdWallet’s interactive Retirement Calculator allows you to determine actual calculations based on your age, retirement age, savings, current income, and other contributions. To visit NerdWallet’s retirement calculator, check out this link.
While online tools are no substitute for pro advice, they can be a useful tool to assist you in making choices about your retirement options.
5. Make Your Business Part of Your Plans
As you plan for your personal retirement, don’t forget to leave your business out. It’s not just about your paycheck – it’s about your ownership! Will you sell the business? Will you keep ownership and earn dividends going forward? That should all be part of your estate planning process as well as your retirement planning process.
Knowing how much to save for retirement and formulating a plan can scary uncharted territory for the small business owner. By taking steps today to look at your savings plans and retirement financial needs, you’ll get the ball rolling toward a fiscally viable retirement.
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