Owning your own business requires lots of time and effort. You have put in blood, sweat, and tears. You have lost sleep over your business. The matters of your business occupy your mind more than anything else, oftentimes.
The obscurity of some distant retirement perhaps crosses your mind from time to time, but it’s years away. You’ll have to deal with that later. Any financial professional will tell you that putting off making plans for retirement is a one-way ticket to working for the rest of your life—and likely becoming a financial burden to your loved ones.
You have probably heard the saying, “The best time to plant a tree is 20 years ago. The second best time is now.” If retirement has crossed your mind, it probably means that it’s time to plant the seed.
Four Phases of Saving for Retirement
Michael Kitces, a world-renowned financial planner, described four phases of saving for retirement: earn, save, grow, and preserve.
As a business owner, earning is the first step. Without income, there is nothing to save. If you feel that you aren’t saving enough, think of ways to either increase earnings or decrease spending. Savings are just deferred spending. Keeping this in mind can help us remember that each dollar has a purpose.
Growth and preservation directly relate to investing and timing. Growing a retirement portfolio will take time and dedication. Preservation requires that you manage risk according to your retirement timeline. A market drop right before your planned retirement could be detrimental to your plan.
You may need to change your investment strategy depending on your stage of life. It’s important to keep each of these phases in our minds because they go hand-in-hand.
Where Do I Save?
Saving for retirement as a business owner means figuring out which type of savings plan works best for you and your employees. Depending on the size of your business and the number of employees you have, you might consider SEP IRAs, Simple IRAs, and 401(k)s.
If you are a sole proprietor, a solo 401(k) is also an option. All of these options allow you to contribute more than the maximum annual contributions in a traditional IRA. If you are maxing out a 401(k) and still want to save more, a cash balance plan could provide a way to put more away towards retirement.
The moral of the story is that there are many different options for business owners to save for retirement. Your choice will likely depend on the size of your company, the number of employees you employ, and the level of complexity you are willing to deal with in setting up the plan. Consider seeking professional help to find the optimal place for your retirement savings.
How Do I save?
Behavioral finance suggests that making regular contributions is the best way for people to save for the long term.
As human beings, we seek instant gratification. Perhaps you have heard of the Stanford University experiment led by Walter Mischel. The experiment observed children as they were offered a treat. The children were told that they could eat their treat right away or they could wait 15 minutes and get an additional treat.
Most indulged while only a few children were able to wait for their additional treat. Is this the same for adults or just a study on child behavior? Another study by the National Institute on Retirement Security (NIRS) found that about 40% of Americans rely solely on Social Security for their retirement income. Adults relying solely on social security means that they opted for spending rather than saving for retirement. It seems that people in general, both children and adults, have difficulty delaying gratification for a later time.
Dollar-cost averaging is a strategy that addresses this behavioral issue (and several others) by investing a regular dollar amount at regular intervals ignoring market trends. Investors, being irrational, often buy when the market is high and sell when the market is low.
This is because we make emotional decisions supported by logic. We might see our portfolio taking a hit during a market correction. Fear sets in (the emotion) and we sell, perhaps using the logic that the loss is indicative of a recession.
Dollar-cost averaging remedies this behavioral issue. The research suggests that saving a regular dollar amount in a regular time interval will increase your returns and give an investor the best chance at saving.
The Power of Simplicity
As a business owner, your biggest challenge is not finding the right account or even calculating your optimal contribution amount.
Most large corporations have had years to develop retirement plans. Simply put, your business did not have a pre-made retirement package for you. The responsibility of figuring out how to plan for retirement falls exclusively on your shoulders. As a result, your biggest challenge is controlling your emotions and delaying gratification.
Carl Richards, financial planner, and author, said, “We often resist simple solutions because they require us to change our behavior.” The decisions we make to save for retirement aren’t very complex. What makes them so difficult and why we put off these decisions in our mind, is the fact that we have to change our behavior. Changing our behavior, however, is what unlocks our financial freedom today and into the future.
Idaho Medical Association Financial Services: Helping Physicians Build Their Future
If you’re interested in working with a fiduciary CFP® professional to help fund your retirement needs, complete with a custom investment portfolio to deliver tangible financial goals, then Idaho Medical Association Financial Services is here to help you.
Idaho Medical Association Financial Services is among the top investment planning firms for doctors in Idaho and Utah. At Idaho Medical Association Financial Services, we focus on assisting our clients with building long-term strategies for wealth while maximizing the enjoyment in their daily lives. We do this by partnering our clients with a dedicated CFP® professional backed by a knowledgeable team of financial experts.
For the team at Idaho Medical Association Financial Services, it’s about so much more than money. It’s about serving physicians and their families and helping them achieve financial freedom and security in their lives. To learn more about 401k plans for doctors or schedule a no-cost consultation, visit us at Idaho Medical Association Financial Services or call (208)-504-1736.