As a young entrepreneur in your 20s or 30s, it’s hard not to focus on immediate profits and revenues.
After all, everyone wants to have a solid income so they can have fun and enjoy life.
Unfortunately, very few entrepreneurs spend as much time thinking about future financial security as they do focusing on present comforts.
While your 60s may seem like a long way off, now is the time to prepare for retirement.
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Overwhelmed by Investing?
Do terms like, capital appreciation, long term growth, income generation, diversification, stocks, bonds, alternatives, and options leave you feeling dizzy? If so, you aren’t alone.
You don’t need to understand how all of these things work. You simply need to recognize the importance of investing for retirement and then develop a relationship with a financial advisor who can coach you through various investment strategies that can hopefully allow you to accomplish both short and long term goals.
Start Saving in Your 20s (or ASAP)
The best way to not feel overwhelmed by the thought of investing and wealth management is to dive right in.
If you’re in your 20s, there’s no better time to start than right now. Why can’t it wait until your 30s or 40s, you may ask?
Well consider the following example brought to you by CNN Money.
Let’s say you’re 25 years old and you begin setting aside $3,000 per year in a tax-deferred retirement account for a period of 10 years, and then you never put another dime in it after that.
By the time you reach 35 years old, you will have contributed $30,000. Assuming a seven percent annual return rate, that investment will have grown to right around $338,000 by the time you’re 65 years old. All from a measly $30,000.
Now, let’s say you procrastinate and don’t start saving until you reach 35 years old. You decide to put the same $3,000 away per year, but figure you’ll do so for an entire 30 years. By the time you turn 65 years old, you will have invested $90,000.
Despite an investment that’s three-times as large, your account will only equal $303,000. What a difference.
By starting your retirement investing in your mid-20s, as opposed to your mid-30s, you could end up with hundreds of thousands of dollars more in your portfolio.
This could ultimately mean the difference between living comfortably for the rest of your life and pinching pennies just to get by.
You don’t want to regret your decision in 30 years.
Retirement Options and Tips for Entrepreneurs
Because entrepreneurship is viewed as an alternative route to the corporate lifestyle of endlessly climbing the ladder, many entrepreneurs look at retirement and think, “That’s something career employees with nine-to-five jobs do.”
Or, they think, “There aren’t any feasible investment options for a self-employed individual.”
Thankfully, both of these sentiments are totally wrong. Not only are there plenty of investment opportunities available to you, many of them are more friendly to self-employed entrepreneurs than to tenured professionals.
Let’s take a look at some options and tips to get you pointed in the right direction.
1. Cut Your Expenses
You can’t very well save for retirement if you don’t have any money to save. While putting away $500 per month may sound great on paper, can you feasibly make this happen?
While there are exceptions, most people can afford to put away at least a couple hundred dollars each month without starving. If you’re doubtful, then you probably need to reevaluate your spending habits.
Now is as good a time as any to develop a budget that lets you see exactly where each dollar comes and goes. What you’ll most likely notice is that you’re bleeding money in multiple places.
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This could be the result of too much online shopping, an exuberant cable bill, or unnecessarily high rent. Find ways to save money and then set this money aside for your retirement accounts, which we’ll discuss next.
2. IRAs and 401Ks
As an entrepreneur or self-employed professional, you have a number of different options for retirement. However, at this point, you should probably narrow your focus to one of the four most common options: Simple IRAs, SEP IRAs, solo 401ks, and Roth IRAs.
Each comes with its own requirements and caveats, but all of them are good options. Here’s a basic guide that explains some of the details.
Make sure you pay attention to things like contribution limitations, pre-taxed income versus after-tax income, and other relevant details.
3. Establish Automatic Deductions
As we all know, manually making monthly payments is frustrating and challenging. You’re bound to forget to make a payment or send over the wrong amount.
The easiest way to maintain discipline in your retirement investing is to establish automatic deductions.
This allows your IRA or 401k to automatically draft a predetermined amount directly from your bank account each week or month. As a result, you can stop worrying about forgetting your payment or falling behind.
Another added bonus of automatic deductions is that they force you work within your budget. If the deduction is already scheduled, you’re less likely to put that money toward something else.
4. Regularly Reevaluate
The fourth tip is to regularly reevaluate your investment strategy. Markets change, interest rates fluctuate, and your own personal financial situation can be quite fluid.
While you may decide on one retirement strategy this year, it could easily change in six or nine months. By revisiting your circumstances, needs, and goals on an annual basis, you can greatly increase your chances of being prepared for long term stability.
5. Hire a Professional
Finally, it’s wise to hire a professional to help you set up your strategy. A financial advisor will discuss your personal needs, help you identify goals, and then look for investment opportunities that fit your criteria.
While there are certainly ways to invest for retirement on your own, do you really want to take a DIY approach to managing your wealth?
For most people, it’s worth paying a small fee to let someone manage their money. And until you gain a firm understanding of what investing for retirement looks like in your situation, you should probably align yourself with a seasoned professional, too.
Putting it All Together
The moral of the story is this: Young entrepreneurs need to start saving for retirement as soon as possible. Not only is it painless to establish an investment strategy, but it can provide additional security for your family should something happen.
While there’s always risk involved when making an investment, something like an IRA or 401k is about as safe as you can get.
Think about the aforementioned tips and meet with a financial advisor to start working through your options.
The number one mistake young entrepreneurs make is not starting a retirement savings plan in their 20s. You can avoid this pitfall by taking action sooner rather than later.