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December 1, 2015
You might be surprised to know just how many people are self employed.
Self employment offers surprises everyday. New challenges and often a different income every month. As anyone who is self employed with an irregular income knows, retirement financial planning isn’t something that comes easy when you’re just not sure from one month to the next.
Today might be a boon, and tomorrow might be a bust. It all evens out over time, but that makes you subject to your income, not master over it. And that leaves retirement savings a difficult thing to even think about.
Contractors and freelancers with a not-so-dependable income have a few more hurdles to jump than someone with a regular paycheck.
But a retirement calculator can help you prevent those erratic paychecks from squashing your best intentions and put you on the path toward a healthy retirement income later. It all starts with building a little safety net and setting a few vital goals.
The Self Employed Retirement Plan: Establish an Emergency Fund for Security
You might think that your emergency fund has little to do with retirement. But it’s a vital part of your overall plan when your income isn’t dependable. Saving up for lean times gives you a good foundation for retirement planning because it lets you stick to other plans. Life’s emergencies don’t have to draw from the money that you’d intended to put toward retirement. And that gives you peace of mind plus breathing room.
Sophia Bera, founder of Gen Y Planning, says that you need at least 3 months of your usual expenses saved up nice and tidy. Six months is much better. You probably have other commitments that make building up your emergency fund a pretty challenging thing to take on all at once. That’s ok. Get one month’s salary in the bank, and then you can build it up more slowly if you have to.
A retirement calculator helps at this stage because it shows you what you’re aiming for. It’s all about perspective, and that’s what this versatile tool is all about. Budgeting software is another good idea, especially something that’s straightforward and doesn’t require a major time commitment. Mint.com has an easy-to-use app that helps you set a basic budget, even with irregular income, and find places to save more money.
Every penny counts when you’re building your emergency fund. And once you have at least a month of expenses covered, then you can start planning for retirement in earnest.
Every day, you’re writing your own life story. What does yours say?
Self Employed Retirement Plan: Establish a Baseline Income Goal
A retirement calculator only works if you know what you earn. That’s part of how it predicts what you’ll need later on, which determines what you need to save now.
Retirement income is usually figured as a percentage of what you earn now. For example, many people aim for about 80 percent of pre-retirement income as a retirement income goal. You should save about 10 to 20 percent toward retirement as soon as possible, says Laura Shin for Forbes. But how can you do that when your income is so erratic? You’ll need to find your baseline first.
A baseline isn’t an average of what you earn, according to Dave Ramsey, but a total of your monthly expenses. Sound backward? It is, at least compared to people with a steady income. With an irregular income, your expenses are the only thing that’s dependable, so Ramsey says to start there and work your way out.
Once you have your baseline expenses, then you can figure your target income. That’s what you need to earn to cover them. With an erratic income, you probably also have some freedom to earn more than you do, if necessary. Most people such as contractors and freelancers have that ability in spades.
When you arrive at your target income, that’s when a retirement calculator really steps up. You know what you need to earn, and that gives you the important financial information that’s necessary for using a calculator. Your target income, not your actual income as it stands right now, is what you’ll add to the calculator. Then you can begin forming your retirement savings goal.
A retirement calculator helps you train your eye on the future.
Self Employed Retirement Plan: Use a Retirement Calculator that Works for Your Needs
One of the first questions a retirement calculator asks is your income. And when you’ve figured your target income, you have an answer to fill that spot. Of course your answer might change, and it probably will, but that’s the same for anyone. No job is truly without risk. And in fact, as a freelancer you have a bit more security than anyone else. If you lose a job, you only lose a portion of your income, not all of it.
The calculator will walk you through numerous steps asking questions about finances and lifestyle. Few of these have anything to do with the fact that your income isn’t dependable. You’ll enter information about savings. With your emergency fund, you have an answer to that one, too, even if you have no other savings to speak of.
Then the calculator will ask about retirement investments. Do you have an IRA? You should, since an employer-sponsored 401(k) probably isn’t part of your plan. The Storic Group also says to think about Solo 401(k) or a Simplified Employee Pension (SEP). This circles back to the 10 to 20 percent savings guideline. If you save between 10 and 20 percent of your target income now, you’re on as good a path as anyone else toward a healthy, viable retirement income later.
If you’ve ever looked at a retirement calculator but then decided that it wasn’t for you, that’s probably because you hit a brick wall up front when it asked about your income. It happens to just about everyone, but it doesn’t have to. When you calculate your target income and go from there, everything else is very much the same.
Some financial advice recommends tallying up your income over a period of months and then forming an average to arrive at a monthly income. But that just helps you design a basic household budget, it’s not the way to fund your retirement.
Retirement income is a goal, and so is your target income when you have as much control over it as you do. An irregular payday isn’t a handicap. It’s an opportunity, just like the opportunity to use a retirement calculator to create a retirement target, and then go out and nail it.
You can try out a calculator at NewRetirement right now and see how simple it is to devise a plan. Tally up your monthly expenses, factor in extras, and determine what your income needs to be. Then use our retirement calculator to build a retirement plan that’s attainable.
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