Retiring Like a Boss for Women Entrepreneurs

by | Mar 15, 2024 | Entrepreneurs, Financial Planning, Women and Finance

Embarking on the journey of entrepreneurship and small business ownership can be frightening. You often give up the security of regular income and benefits in the hope of a fulfilling, flexible and prosperous new career. As an entrepreneur, your future cash flow is anything but consistent. Some prospective and new entrepreneurs overlook the long-term effects of that leap.

What happens to your future retirement plans when you stop contributing to a workplace retirement plan, and what solutions are there for these entrepreneurs?

And what about women entrepreneurs in particular?

Some of the unique challenges that women face every day can have a compounding negative effect on their ability to achieve their retirement goals. The gender wage gap says that women overall earn 82-cents for every dollar a man earns (70-cents for Black women1, 65-cents for Hispanic/Latina women1, and 69-cents for self-employed women2), but that is just the start. Women are often the caretakers in the family. This means taking time off work to care for children and aging parents. This time off means fewer opportunities for contributing to workplace retirement plans and fewer opportunities for pay raises and promotions. This also means they might stop saving, start withdrawing from savings, take on debt, or miss social security contributions.

There is also the “pink tax,” which is the term used to reflect the additional cost of products made for women (think pink razors). Fifty percent of everyday products cost more for women than for men, which means their lifetime expenses are higher. The gender wage gap widens into the gender wealth gap or gender retirement gap. All this implies that generally a woman’s retirement nest egg needs to be much bigger than a man’s, and sound financial planning is vital to achieving this.

 

There are several options for entrepreneurs to continue to contribute towards their future financial security:

  • SEP IRA: An entrepreneur (sole proprietor or small business owner) can establish this workplace retirement plan into which the business may contribute (there is no employee deferral) a maximum annual contribution of the lesser of $69,000 (for 2024) or 25% of compensation (up to $345,000). Of the entrepreneur workplace retirement plans, this is the easiest to set up and manage, as well as the most flexible. Taxes are deferred until withdrawal after age 59 ½.
  • SIMPLE IRA: An entrepreneur with a small business (under 100 employees) can establish this workplace retirement plan into which the business must contribute to all eligible employees. Employees may defer up to $16,000 annually (for 2024; $19,500 if over 50 years old). This workplace retirement plan is also relatively easy to set up and manage. Taxes are deferred until withdrawal after age 59 ½.
  • Individual(k) or Solo 401(k): This workplace retirement plan works exactly like the traditional 401(k) except this is only for when the business owner is the only employee (employee owner spouse may participate as well). Contributions can be made as both an employee (deferral up to 100% compensation, up to $23,000 in 2024, $30,500 if over age 50) and as employer (25% of compensation, up to a combined $69,000). This plan requires more setup and administration and therefore, fees, but allows for the maximum contributions for the sole owner.
  • Traditional IRA: An entrepreneur can contribute up to $7,000 (for 2024; $8,000 if over 50 years old) if she has income over $7,000. This is tax deductible within income limits. Taxes are deferred until withdrawal after age 59 ½.
  • Roth IRA: An entrepreneur can contribute up to $7,000 (for 2024; $8,000 if over 50 years old) if she has income over $7,000. Contributions have annual income limits. These withdrawals are tax-free after age 59 ½.
  • Spousal IRA: This is the only retirement plan that allows contributions without income. It has the same rules as the Traditional IRA but allows a non-working spouse to continue to invest in her future financial security in those years when she is not working.

The bottom line is we have a responsibility to our future selves to understand our own financial security.

These retirement plans are tools to help you achieve your goals. You will need to find a financial advisor to help you open and invest in the account. When looking for advisors that are trustworthy and transparent, look for fiduciaries (they must, by law, put your needs first) and fee-only (note, not fee-based) advisors. Look for credentials (I am biased toward CFP®’s) and interview them like they are going to care for your children (isn’t your nest egg just as important?).

Finally, I will leave you with this quote by one of my admired peers, Bonnie Sewell:

“A woman with assets is an asset the world needs.”