6. Think beyond your 401(k).
In addition, to an employee-sponsored 401(k), open a traditional IRA. Here, a percentage of your income can be automatically deposited into a separate savings account. And, even better, it will not be taxed as long as you leave it there.
By the time you withdraw it, you will probably be in a lower tax bracket, so you will save money. An IRA fund can be deposited in a bank or invested in stocks, bonds, or mutual funds.
Roth IRAs are also available, but they have more conditions than regular IRAs. The amount you qualify for depends on your income and is different for married couples and singles. During the first two years, you can contribute $3,000, and by the sixth year, $5,000. Earnings and withdrawals from Roth IRAs are not taxed; however, contributions to these accounts are not deductible.
But, are there any retirement savings plans tailored for entrepreneurs? Yep.
- Simplified Employee Pension (SEP) IRA. Are you a sole proprietor? If so, then a SEP-IRA retirement plan is worth exploring. It’s easy to set up, flexible and has favorable contribution limits.
- Savings Incentive Match Plan for Employees (SIMPLE) IRA. Even though SIMPLE IRAs are available to sole proprietors, they are preferable for businesses with fewer than 100 employees. It’s kind of like a hybrid IRA/401k plan.
- Individual 401(k). This is similar to a traditional 401(k). However, your spouse will be able to participate as well. Additionally, you may contribute both as an employee and as an employer.
Other options include a profit-sharing plan or a money purchase plan.
7. Save it for a rainy day.
Are you familiar with Murphy’s law? If not, it’s a popular adage that states: “things will go wrong in any given situation, if you give them a chance.” Or, more succinctly, “whatever can go wrong, will go wrong.”
At some point, you will have to deal with a financial emergency. It could be needing a new roof on your home, replacing your vehicle after the transmission goes, or buying a new piece of equipment for your business. If you don’t have an emergency fund, then you’ll have to dip into your savings. Or, even worse, cover any unexpected expense using a high-interest credit card.
That may sound innocent enough. However, this can certainly derail your goal of becoming a millionaire. And, it will also delay your retirement.
The easiest solution? Have an emergency fund that covers at least three to six months of your expenses. And, make sure that you don’t keep this money in the bank. You want to stash it somewhere where it’s earning more interest like a high-yield savings account, REIT, or short-term note.
8. Invest in broadly diversified index funds.
“Broadly diversified index funds can be your investment vehicle for a ride to becoming a millionaire retiree if the stock market performs as it has in the past,” notes Bankrate’s senior reporter James F. Royal, Ph.D.
“If you know little about investing and have no desire to learn more, you still can be a successful investor,” he adds. The reason? Index funds.
An index fund is an investment grouping of assets, such as stocks or bonds. And, according to Royal, they should have the following attributes:
- Broadly diversified. Funds of this type invest in stocks from a broad range of industries.
- Invested in stocks. Despite being more volatile in the short term, stocks offer the best long-term gains.
- Low cost. The expense ratio of an index fund should be below 0.5 percent, so you can find a cheap, low-cost index fund.
- Good long-term track record. Choose funds with annual returns of at least 10 percent over the previous 10 years. In many cases, returns can reach 15 percent.
It is these characteristics that you should seek if you want to generate great long-term returns.
Among the most popular index funds are those linked to Standard & Poor’s 500 – which includes hundreds of America’s best companies. “The best S&P 500 funds are also among the cheapest funds and may cost just a few dollars a year for every $10,000 you have invested,” he states. For the longest periods, this index has provided about 10 percent annual returns.
The Nasdaq composite index, which includes some of the world’s largest tech companies, is another good option. In fact, it regularly tops Bankrate’s list of the best mutual funds.
9. Work with a financial advisor.
If you intend to retire early, you must deal with two major hurdles:
- Saving for retirement takes less time.
- Your retirement will give you more free time.
A financial advisor can assist you with developing an investment strategy that will help you meet your retirement goals. In addition, he or she can help you figure out how much you need to invest each month to reach your goals.
Together with your advisor, you can make sure you receive money that lasts after retirement. Income streams include dividends, required minimum distributions, Social Security, pensions, and investments in real estate.
Choosing an advisor that you are comfortable with and trust is imperative since you may be working with that person for decades. Furthermore, the cost of a financial advisor should be seen as not just their time, but as their expertise, as well. In the end, if you hire an advisor with the right expertise, they will more than cover the cost.
10. Don’t believe what discouraging people say.
“As soon as you accept that you’re not going to become a millionaire, you probably won’t – you’ll settle for the ordinary,” says Jeff Rose CFP® and founder of Good Financial Cents. “Your beliefs about your future matter a whole lot, and will – in part – help determine your future.”
“After all, your beliefs affect your actions, and your actions affect your outcomes,” Jeff adds. “When you listen to discouraging people, you’re letting them accomplish their goal – to drag you down and ensure you don’t surpass their success. No good.”
As an alternative, he suggests that you prove them wrong. But stay humble in your efforts. “Your results will speak louder than your words, I promise you.”
I would also add that instead of wasting your time with these types of people, you rub shoulders with other millionaires. Maybe you could join the board of a charitable organization or attend networking events. If you can’t meet them in person, then surround yourself with books like “The Millionaire Mind” by Thomas J. Stanley or “Secrets of the Millionaire Mind” by T. Harv Eker.
