Retirement for the self employed

[North80]

Mid 40's self employed guy with zero retirement saved
and not a home owner.

Yeah, I've messed up. There's a lot to it, but I won't bore you all with the details. I'm a wild child with no kids that had the travel bug and enjoyed life to the fullest.

Right now, I pull around 60k with my business but only around 25k on paper because of obvious reasons.

I feel like I can devote around $400 a month to retirement at the moment. It's not much, but it's a start.

I've looked into stuff like 401k plans, annuities, precious metals, bonds etc

For a guy in my situation, what are some things I should definitely avoid?

How do I find a financial advisor that doesn't operate like a used car salesman?

I can't buy a home were I live. Am I insane not to relocate?

Hit me with it, and don't be gentle. I know I've messed up.

 

[Kings over Queens]

Oof.

Forget about a 401k, you don't need it given the low contribution limit you are bound by. An IRA would work just fine. Forget annuities, metals...blah blah blah.

Any brokerage like Schwab or Fidelity will do, and you don't need an advisor. Buy their S&P 500 index fund and don't look back.

For a guy in your situation I'd be looking for easy, low cost, set it and forget it.

I'll cast an opinion that a Roth would be better given your low tax bracket.

 

[Kings over Queens]

by the way, I don't think you've messed up. by all accounts you've lived a pretty full life. I bet we'd have a lot of fun sitting around drinking bourbon and listening to your stories.

 

[Aerides]

For now, just focus on a good egg in a high yield savings account.

Do you have an emergency fund? X months of rent saved? I'd say the same to you as a 25 year old, get your financial house started and in order before you start thinking about buying a home or retirement savings. Do that for about a year, then ask the same question when you have an excess 10k ready for long term investing.

You have time. Not for ER, but for a regular retirement, sure.

Oh... despite those low taxes are you paying into SS/MC? That would mean a big difference in your approach.

 

[Time2]

As another said, save an emergency fund. Then I would invest in the S&P 500 index ETF such as, VOO or another Total Stock Market index ETF, VTI.

If you continue saving $4,800 a year earning 10%, over the next 20 years will get you over $300k. That would be very helpful, and hopefully that $4,800 savings amount could go higher over the years.
Now investing in a vehicle like a Roth IRA is probably a good choice, you really don't need a tax deduction in your tax bracket, any contributions grow tax free and you don't have to pay tax on dividends or interest each year. If you get to the point that you max out the Roth limit, LTCGs froma taxable account can be used as tax free income if you keep your AGI income below a certain level, and I think you could. I would not be afraid to use a taxable account after maxing out a Roth.
OH yes, you should try to maximize your income to get a decent SS check. I have an acquaintance and a relative, one that cheated on his taxes and will get about $800 in SS, the other, helped a significant other for many years other but never got paid and will be about the same $800.
I was self employed for about 28 of my 37 years of accumulation. I took full advantage of SEP/IRAs, IRAs, HSAs, Roth/IRAs, and even college tuition credits. You know those loopholes those darn rich people are said take advantage of, to our detriment.

 

[Gumby]

.....

Oh... despite those low taxes are you paying into SS/MC? That would mean a big difference in your approach.

Good point. I have known people who always got paid in cash so they couldn't be caught if they didn't report it on their taxes. Cool, no taxes. But they also weren't paying into Social Security and Medicare and then were shocked that they were not getting either (or only a tiny amount of SS) after they couldn't work anymore and had spent all that "tax free" money. In fact, if I recall correctly, we've seen a few people appear on this board with that story.

 

[North80]

For now, just focus on a good egg in a high yield savings account.

Do you have an emergency fund? X months of rent saved? I'd say the same to you as a 25 year old, get your financial house started and in order before you start thinking about buying a home or retirement savings. Do that for about a year, then ask the same question when you have an excess 10k ready for long term investing.

You have time. Not for ER, but for a regular retirement, sure.

Oh... despite those low taxes are you paying into SS/MC? That would mean a big difference in your approach.

I have easily liquidatable assets in the form of high dollar firearms and musical instruments for an emergency. I own about 30k in guitars alone. I've considered taking my time and getting top dollar for the one of them that I don't play that's been
valued at 23k on its own, but it was my grandma's and it just feels slimy to do so.

I usually have around 5k in savings, but sometimes dip below that in the winter when I'm slow.

Yes, paying into SS, and it's figured in differently when your self employed.

 

[Sunset]

OP - As self employed, open a Vanguard solo-401K plan, with both IRA and Roth sides.

Then you can contribute to whatever side you want IRA & ROTH.

Having your own 401K plan and being self employed means you are limited to contributions of approximately $55,000 per year !!!

Phone Vanguard they will help you set it up and there is no cost.

By contributing a bunch to an IRA, you will lower your taxes without having to resort to wasteful and sometimes odd expenses to lower your income, and you will save for retirement too !!

 

[North80]

Good point. I have known people who always got paid in cash so they couldn't be caught if they didn't report it on their taxes. Cool, no taxes. But they also weren't paying into Social Security and Medicare and then were shocked that they were not getting either (or only a tiny amount of SS) after they couldn't work anymore and had spent all that "tax free" money. In fact, if I recall correctly, we've seen a few people appear on this board with that story.

I worked for the man in my 20's and 30's, so I would already qualify. It's probably not a lot though.

 

[North80]

For now, just focus on a good egg in a high yield savings account.

Do you have an emergency fund? X months of rent saved? I'd say the same to you as a 25 year old, get your financial house started and in order before you start thinking about buying a home or retirement savings. Do that for about a year, then ask the same question when you have an excess 10k ready for long term investing.

You have time. Not for ER, but for a regular retirement, sure.

Oh... despite those low taxes are you paying into SS/MC? That would mean a big difference in your approach.

Would taking the 10k or so that I dodge in taxes and putting it into something else outperform the gain in SS by retirement age? I did work a normal 9-5 for many years.

 

[HarveyS]

For a guy in my situation, what are some things I should definitely avoid?

One thing to avoid is getting caught by the IRS or your state tax authorities for under-reporting income.

I'd suggest you start playing by the rules. Report all your income and all your expenses. It won't cost that much in the long term, and the benefits will likely outweigh the costs.

 

[North80]

by the way, I don't think you've messed up. by all accounts you've lived a pretty full life. I bet we'd have a lot of fun sitting around drinking bourbon and listening to your stories.

Played in a couple touring rock bands.
Lived in New Zealand for a year
Was a bartender at a resort in key west for a while.
Went pack packing in Peru for 5 months.
Lot's of pretty girls
Lot's of booze
Lot's of crazy situations.

Probably going to pay for it a bit by working as an old man, but maybe worth it. My Grandpa died less than a year after retirement, and spent his entire life saving, only to have his wife burn through it all in about 10 years and leave nothing to my mom and Aunt, So who knows?

 

[North80]

One thing to avoid is getting caught by the IRS or your state tax authorities for under-reporting income.

I'd suggest you start playing by the rules. Report all your income and all your expenses. It won't cost that much in the long term, and the benefits will likely outweigh the costs.

I play by the rules.
The rules are set up for guys like me to deduct litterally everything though.
Not a huge portion of my income is cash, but reporting cash is pretty silly for a guy in the trades. 90% of my customers pay by a card these days. The rest are usually check, so it gets reported.

It's just really easy to not make hardly any money on paper as a small business owner.

 

[Time2]

Yes, paying into SS, and it's figured in differently when your self employed.

What do you mean by that? You pay 15.3%, broke out as 12.4% for SS and 2.9% for Medicare. You get to use 1/2 of the total amount as a tax deduction, just as an employer would because it is a business expense.

 

[aja8888]

What do you mean by that? You pay 15.3%, broke out as 12.4% for SS and 2.9% for Medicare. You get to use 1/2 of the total amount as a tax deduction, just as an employer would because it is a business expense.

^^^^Exactly, that's how it was for me in 20 years of self employment. The Solo 401K is a great vehicle. I had one and put a lot in it each year.

 

[North80]

What do you mean by that? You pay 15.3%, broke out as 12.4% for SS and 2.9% for Medicare. You get to use 1/2 of the total amount as a tax deduction, just as an employer would because it is a business expense.

You're right for sure.
I didn't mean technically.

I just mean when your self employed, you tend to pay a lot less into ss because you write everything off, which lowers your tax burden down to nothing.

When you work for the man, most people are not writing off stuff like a new phone, a new jacket or dish soap because it's for "the business."

Most people in my income bracket that work in the trades like me get a standard deduction and call it a day. They're not writing off 10 grand in itemized deductions for things they would be still purchasing even if they didn't run a business. It's a game, but it's still playing by the rules.

I'll write off anything my accountant gives me a green light on, which is a lot when you're a contractor.

 

[ivinsfan]

You might want to think about not being so aggressive with the tax write offs and kicking a little more into SS. Sounds as if a decent SS payment will be crucial to an actual retirement. Are you worried about paying taxes or having money for your old age? It's doesn't sound as though your business has any actual resale value.

 

[marko]

Good point. I have known people who always got paid in cash so they couldn't be caught if they didn't report it on their taxes. Cool, no taxes. But they also weren't paying into Social Security and Medicare and then were shocked that they were not getting either (or only a tiny amount of SS) after they couldn't work anymore and had spent all that "tax free" money. In fact, if I recall correctly, we've seen a few people appear on this board with that story.

Everything eventually reaches equilibrium.

 

[North80]

You might want to think about not being so aggressive with the tax write offs and kicking a little more into SS. Sounds as if a decent SS payment will be crucial to an actual retirement. Are you worried about paying taxes or having money for your old age? It's doesn't sound as though your business has any actual resale value.

Making more doubles the price of my healthcare, and the taxes are brutal in my state.
But you're right.

I don't want to ever retire. That just sounds boring to me, but I don't want to be working 40 hours a week doing real work as a senior ether. Ideally, I'd like to do something part time like run a food cart or do something like give guitar lessons until I'm too old to work. If I live long enough to not be able to work at all, my quality of life is going to be trash regardless of rotting in section 8 or living in my own home with money in the bank. The thing is, working part time isn't going to work without a retirement of some type, especially in 20 years.

Are you allowed to dump more into social security without earning more?

 

[Time2]

You're right for sure.
I didn't mean technically.

I just mean when your self employed, you tend to pay a lot less into ss because you write everything off, which lowers your tax burden down to nothing.

When you work for the man, most people are not writing off stuff like a new phone, a new jacket or dish soap because it's for "the business."

Most people in my income bracket that work in the trades like me get a standard deduction and call it a day. They're not writing off 10 grand in itemized deductions for things they would be still purchasing even if they didn't run a business. It's a game, but it's still playing by the rules.

I'll write off anything my accountant gives me a green light on, which is a lot when you're a contractor.

My wife and I wrote off very little in the small business we ran for 18 years. About the only things I recall were our phones, fuel, plates and insurance on our business van, also we had metered electric for freezers we had for inventory, but never a home office deduction, never a business meal. But, being good, savers we maxed out IRAs, SEPs and HSAs, we were often paying 2% to 4% of our actual gross income in federal tax, because of what we put in tax deferred vehicles. I'm not sure that was for the best with RMDs getting closer every year, but Roth Conversions are whittling that down.

 

[calmloki]

We, primarily me, worked for Uncle Sam, then the man for a while, then got into rental real estate, income of which the IRS considers "unearned" (hah! not the way we did it!), so no SS had to be paid. Result is I now collect a $136/month SS check and a Medicare premium contribution. Darn happy to get it. Our retirement is lushly overfunded by our own damn selves. At almost 74 we still have 19 rental apartment doors. Steven Tyler is still playing - maybe you will be too.

Suggest you have a come-to-Jesus moment and crank down the nut on your spending. We did and have and do, with the result being that as my body hurts more I'm able to fund things that make me more comfortable. You will hurt more as you get older and want to work less.

 

[LateToFIRE]

North80, you've already gotten plenty of good advice here. Add'l thoughts:

1) I'd echo the emergency fund - do that first. You don't want to be in the position of selling off firearms or guitars in a crunch.

2) Have you considered disability insurance? At your age and presumably physical work, your risk of disability is very high before you even make it to retirement. I'd be concerned about that first and foremost.

 

[LateToFIRE]

We, primarily me, worked for Uncle Sam, then the man for a while, then got into rental real estate, income of which the IRS considers "unearned" (hah! not the way we did it!), so no SS had to be paid. Result is I now collect a $136/month SS check and a Medicare premium contribution. Darn happy to get it. Our retirement is lushly overfunded by our own damn selves. At almost 74 we still have 19 rental apartment doors. Steven Tyler is still playing - maybe you will be too.

Suggest you have a come-to-Jesus moment and crank down the nut on your spending. We did and have and do, with the result being that as my body hurts more I'm able to fund things that make me more comfortable. You will hurt more as you get older and want to work less.

North80, you've already gotten plenty of good advice here. Add'l thoughts:

1) I'd echo the emergency fund - do that first. You don't want to be in the position of selling off firearms or guitars in a crunch.

2) Have you considered disability insurance? At your age and presumably physical work, your risk of disability is very high before you even make it to retirement. I'd be concerned about that first and foremost.

3) Taking a page from Calmloki, the other thing you really want to think about would be how to leverage your skills into something tangible and lasting. I know quite a few guys in the trades and contractors who became landlords becuase they had a cost advantage in terms of rehab, maintenance, etc. Know you feel you need some $$$ to get into that but there may be creative ways to get started, possibly by partnering with someone else.

 

[North80]

North80, you've already gotten plenty of good advice here. Add'l thoughts:

1) I'd echo the emergency fund - do that first. You don't want to be in the position of selling off firearms or guitars in a crunch.

2) Have you considered disability insurance? At your age and presumably physical work, your risk of disability is very high before you even make it to retirement. I'd be concerned about that first and foremost.

How much should I have for an emergency fund?
Being self employed, I've just sorta had a few credit cards for all that.

If I got to the point that I couldn't do physical work, I'd go back to selling cars or RV's. I have several years experience, and I actually have a marketing degree from a million years ago as odd as that sounds. Clearly, I didn't retain much from finance.

Anyways, I'd hate it, but I actually made more selling cars at a dealership than running my business. I could also just hire employees for my business. If the labor market was better, I'd do it right now, but it's a headache, and obviously I'm not a super motivated go getter type when it comes to making money if it involves BS.

I'm just one of those free soul type of guys that can't do the whole hamster in a wheel 9-5 thing, but I could if I was forced to.

 

[North80]

3) Taking a page from Calmloki, the other thing you really want to think about would be how to leverage your skills into something tangible and lasting. I know quite a few guys in the trades and contractors who became landlords becuase they had a cost advantage in terms of rehab, maintenance, etc. Know you feel you need some $$$ to get into that but there may be creative ways to get started, possibly by partnering with someone else.

With my skills, if someone handed me the money right now, I'd buy a wrecked foreclosed home, and double my money flipping it. Only problem is I live in a part of the country that realistate has become too expensive to do that type of stuff without partners for most guys like myself. The housing crises is awful here. Businesses are still getting into bidding wars on pretty much any piece of realistate a profit can be made off of.

Partners for that type of stuff are hard to find around here because there's a lot of guys like me out there, and only so many investors.

I feel like at some Pont, I'll probably have to leave the west coast, but I'm stubborn. If I moved to some place like the Midwest, I would be infinitely better off. It's just the idea of moving some place I've never been to build a life in my 40's. I sure did it a lot in my youth, but I'm tired of moving, and I've built a life here.