American Translators Association (ATA): Retirement Planning

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American Translators Association (ATA): Retirement Planning

Retirement Planning

Saving for retirement is essential for independent business owners and requires long-term planning. As you get ready to process your taxes for 2008, take a critical look at your retirement savings strategy.

Dear Business Smarts:

I have been working as an independent translator and interpreter for over 20 years with a good annual income. Once my children are grown, I would like to scale back my workload so I can travel. Are there special rules for the self-employed when it comes to retirement savings? What can I do to plan ahead? T.S., by e-mail

Dear T.S.,

Early spring is an ideal time for long-term planning, while you review your tax records and enter data into tax software or discuss the figures with an accountant. As you categorize spending and look at your income and expenditures over the past year, you get an excellent idea of your business cash flow and your potential for saving.

Think about your long-term plans: Where would you like to be 10 to 20 years from now? How much money will you need to fulfill your dreams of retirement? Look at your current savings, your projected Social Security benefits, and likely inflation rates.

There are many retirement calculator tools on the Internet that can assist with long-term projections. To make sure that long-term planning and a financial review are part of your annual tax work, save a copy of your planning notes in the same folder with your tax returns.

If you have not already done so, set up an individual retirement savings account (IRA). As a business owner, you are entitled to start a so-called SEP-IRA, an account for tax-deferred retirement savings specifically tailored for the needs of self-employed people. SEP-IRAs are easy to open with almost any financial institution (insurance companies, banks, mutual funds), involve negligible administrative costs and overhead, and are very flexible.

You must establish the account by April 15, 2009, for the 2008 tax year, and you may put away as much as 18.5% of your earnings (up to $46,000) every year thereafter. If you are hesitant to put your money in the stock market, consider a money market account for the moment.

Most calculations of earnings are based on the "net profit" on your federal Schedule C, for example:

  • Your "net profit" from Form 1040, Schedule C: $38,500
  • Maximum amount you can save in your SEP-IRA: $7,156

Click Self-Employed Retirement Plan Maximum Contribution Calculator for a useful online calculator.

Depending on your individual budget situation, it may not always be feasible to put away that much, but the annual maximum can serve as a guideline for your personal savings plan. It may be a helpful strategy to have a fixed savings amount transferred automatically from your business account every month. For example, if you paid $250 a month into your SEP-IRA, you could save $3,000 a year for retirement. That is a potential contribution of more than $100,000 over 20 years to a fund that, depending on market conditions and the type of account you select, has the potential to earn even more in dividends and capital gains.


Reprinted from The ATA Chronicle: February 2009, p 29