Save For Retirement on a Shoestring: A Guide for Small & Home-Based Business Owners

As countless small and home-based business owners struggle to maintain a healthy cash flow amidst poor sales and rising costs on everything from commodities to health care, retirement planning often falls by the wayside.

The following tips can help you save for retirement while on a tight budget.

Putting in place a retirement plan for yourself and your employees to fall back on is essential. According to the Employee Benefit Research Institute’s (EBRI) 2010 Retirement Confidence Survey, almost half of all Americans have less than $10,000 saved for retirement, and the number is rising. EBRI reports that 43 percent of Americans fit this description in 2010, up from 39 percent the previous year. Even more telling is the finding that the number of people who had less than $1,000 saved for retirement rose by 7 percent from the previous year to a total 27 percent.

Those who are self-employed or who own very small businesses (10 or fewer employees) in particular need to be proactive in setting aside funds for retirement, since there are no matching employer contributions to rely on, there may be fewer assets to put aside, and the cost of the best retirement plans may make them prohibitive to the smallest businesses.

But what should you do if money is tight and there seems to be little, if any, money to put aside for the future?

Strategies for Retirement Saving When Income is Low

A rundown of expert advice on retirement planning and savings usually offers the following guidelines: try to put aside at least 10% of your yearly earnings into a retirement account, start saving as early as you can, aim to build a total retirement savings that will give you 75% of your current income for 30 years, and make sure that you include stocks and other equities in your portfolio.

Sounds nice, except for most people that will mean being able to put aside at least several hundred thousand dollars before retirement (a modest $20,000 a year for 30 years is $600,000), and that’s not including those unexpected situations and expenses, like poor health.

If you are struggling with low or inconsistent income as a small or home business owner, then being able to save for retirement may seem like an overwhelming pipe dream. It’s hard enough paying for today, let alone worrying about tomorrow. In this case, your approach to retirement saving will be different. Instead of worrying about income percentages, your focus should be on squirreling away a few dollars a month ($25, $50, $100), and on choosing those investment products that will maximize your return, yet not carry an astronomical risk of losing it all.

It is possible that your economic circumstances can change for the better. But even if they don’t, the very fact that there is some money that has been put aside can help to ease the financial burden of retirement and augment any social security checks that you may stand to receive. This is especially important given that steep cutbacks in social security payments and benefits are a reality. Bottom line: even if you fall short of what you need, according to common sense it’s still better than having nothing at all.

Here are a few strategies to help you put money aside:

  • Enroll in an automatic savings plan. Make sure that a small portion of your income is automatically deposited into your retirement account. The goal is that it should be doable- even if you can only manage $20-$25 a month. If you make the amount too high then you be tempted to change it when times are tough, and you can always add to that amount should there be a sudden windfall of cash.
  • Take advantage of tax deductions. With most retirement plans, the contributions you make are tax deductible in the year that you make them (you’ll pay taxes when you start making withdrawals). This can help to increase your disposable income a little bit for the year.
  • Invest a portion of your tax refund or other lump sum amount. If you do not need the money for immediate expenses or to pay down debts, you might want to consider saving a portion of your tax refund, monetary gifts, or other lump sum infusions of cash for retirement.
  • Keep investment costs to a minimum. There may be several expenses and fees associated with a particular retirement account such as an activation fee, annual fees, trading commissions, management fees, and a closing fee. This can take a bite out of your nest egg. Make sure you do your research and pick an account to suit your needs and saving patterns. If you don’t plan on investing in the stock market, online bank Ally Bank offers several retirement accounts with no investment minimum and no fees. It may be something to consider.

What Are the Best Retirement Plans to Invest In When Income is Unpredictable?

With all the qualified retirement plans and programs available it may be hard to know which one is right for you. Though it pays to consult a qualified professional to determine the best retirement savings plan to suit your particular circumstances, here is a brief rundown of four of the most popular options when income is low or inconsistent for small and home-based business owners and the self-employed:

  • The Simplified Employee Pension Plan ( SEP). The SEP is definitely the simplest and cheapest of the qualified retirement plans for the self-employed or for those who employ only a few people. The plan is funded with tax-deductible employer contributions, and the employer must cover all eligible employees. Self-employed individuals and small business owners can make tax-deductible contributions to SEP accounts of up to $49,000 per year in tax year 2011. SEPs are also flexible in terms of contributions from one year to the next. If, for example, business is slow one year, account owners can reduce their SEP contributions or skip them altogether.
  • Traditional IRA and Roth IRA Accounts. IRA accounts are available to anyone who earns taxable income and they can be held simultaneously with other qualified retirement accounts There are two types of IRA accounts: the traditional IRA and the Roth IRA. With the traditional IRA, you can claim a tax deduction on contributions and your account earnings grow tax-deferred until you take the money out upon retirement. With a Roth IRA, you do not claim a tax deduction. Your contribution is made with after tax income. The retirement earnings in your Roth IRA then grow tax-free. This means you will not have to pay taxes on your distributions from the account. For more information on IRA’s and Roth IRA’s see IRS publication 590.
  • Self-Employed 401(k). Unlike the popular 401(k) plan which can get expensive and difficult to manage, the self-employed 401(k) is relatively easy to set up and inexpensive to maintain. Moreover, the self-employed 401(k) offers higher contribution limits than other retirement plans, it can be consolidated with a traditional IRA account, and there ‘s more flexibility with contributions. For more information on Self-Employed 401(k) plans, read this post over at
  • Keogh Retirement Plans. Those who are self-employed and support only a handful of employees may want to consider the self-employed Keogh plan. Like the other qualified retirement plans, the account holder must be 59 1/2 in order to withdraw money from the account, and required distributions begin when the account holder reaches 70 1/2. Similar to an IRA contributions are pre-tax thus lowering taxable income, but contribution limits are more liberal than with an IRA.

For more information on retirement plans in general, be sure to also read IRS Publication 560.

How Should You Invest Your Money?

Many financial experts suggest putting a portion of your retirement savings in the stock market- the percentage will depend on the amount needed at retirement, the amount invested, as well as the age of the investor. If you don’t have much to put aside and/or you are starting to invest later in life, then putting an emphasis on equities in your portfolio could bring you better possible returns. If you invest in index funds or the like, the stock market has a history of giving 10% returns per year on average.

But, on the other hand, there are no guarantees, as we saw in 2008 when the stock market plunged 40% below norms. More stocks equals more volatility. At any rate, with these kinds of investments it’s a gamble, and you should definitely consider seeking the advice of a qualified financial advisor to ensure that your investment portfolio has a level of diversity and risk that you are comfortable with.

You should also be aware that there are safer options to invest in, such as long-term CD’s and bonds, but keep in mind that you won’t be earning as much in interest from these products.

In short, get professional advice and invest wisely (even if it is on a very small scale) so that your later years can be golden, instead of in the red.