Money Mondays: Saving for Retirement Without An Employer-Based Plan

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    In today’s “Money Mondays” segment, Mellody Hobson discusses saving for retirement.

    You are here with an important topic this morning – how to save for retirement if you don’t have access to an employer-sponsored plan.

    It is a really important topic, and it is not just for those who are self-employed – it is also important for people who are working multiple part-time jobs, or are freelancing in between jobs, because you should always be saving for retirement. And it is even more important now. One of the key trends that has emerged from the economic downturn is the larger segment of the population that is working multiple part-time jobs, many of which do not have retirement plans.

    First things first – how much should someone in this situation be saving?

    If you are saving for retirement – and ideally that is everyone – you should try to save between 10 to 15% of your gross income. That is your income before taxes. So, if you are making $3,000 a month, but taking home $2,500 a month after taxes, you should aim to put $300 dollars into your retirement fund each month. If you cannot reach that threshold, try to save anything you can. That seems like a lot, especially if you are just making ends meet, or just starting up your business, but don’t despair! Your contributions to most retirement funds are pre-tax, meaning that what you save is deducted from your overall taxable income. So come tax time, you will be paying taxes on a smaller adjusted income, and you could receive a much larger tax refund.

    So what programs or plans are available for those who are self-employed or freelancing?

    There are a couple of options for our listeners if they are self-employed or freelancing.

    The first option – and the one most applicable for free-lancers and self-proprietors – is the Independent 401(k). Also called the solo 401(k), these are 401(k) plans set up for individuals running a sole proprietorship or a small business with a spouse or an immediate family member. It works exactly like a conventional 401(k), with one major difference. In a traditional 401(k) plan, the employer matches a certain percentage of the employee’s pretax contributions. Since solo businesses owners are both employer and employee, the IRS allows them to make extra contributions up to 25 percent of the business’ earnings. Solo 401(k)s are harder to find, cost more to maintain and incur more rules than SEP IRAs.

    If you are a small business owner and have a small number of employees, the Simplified Employee Pension IRA or SEP IRA is the way to go. It is the easiest to set up and incurs the lowest account management fees from banks and mutual funds. It’s perfect for one-person businesses but can also be used if you have employees. Only the employer makes contributions – and this is what sets it apart from the Independent 401(k). One of the best features is that there are no required minimum contributions and you can wait until April 15 to pay in. That way, you can put away more when business is good and less when times are tight.

    Those are good options for people who are doing their own thing, but what about people who are part-time or work for companies who don’t offer plans?
     
    If you are working a couple of jobs but don’t have your own business and are not freelancing or simply working at a company that does not have benefits – you will use a traditional independent retirement account, or IRA. In these accounts, contributions are often tax-deductible, all transactions and earnings within the IRA have no tax impact, and withdrawals at retirement are taxed as income. This type will allow you to save if you haven’t struck out on your own.

    One final item – while it has not been implemented yet, the White House has announced a new initiative to help low-income earners save called the myRA. It will be target at encouraging those who are just getting started or who are traditionally overlooked when it comes to retirement savings programs, so stay tuned for that!

    Any additional advice for our listeners?

    A couple more things: First, when you are saving for your retirement on your own, outside of your company, it can be easy to let it go by the wayside. With employer-backed plans, you traditionally sign up for your contribution to be deducted from your paycheck before you get it. Once they have chosen the program or account type that works best for them, I would advise our listeners to set up a direct deposit to their accounts to make sure that they are contributing every month. It can be tempting to go out with friends or head to the mall with that money if it is sitting in your checking account, so avoid the temptation and just have it automatically deducted.

    Finally, if you are having a hard time setting things up, do your research on each one, and reach out to a financial advisor. Companies like mine are in the business of helping people, so just know you are not alone! Its best to reach out and get help rather than just letting this go by the wayside!

    mm

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