How to Invest in Your Most Valuable Asset: You
Worried that you’ll run out of money in your later years? You’re not alone. America is undergoing an epidemic of retirement anxiety.
According to the latest Retirement Confidence Survey, spearheaded by the Employee Benefit Research Institute, only 21% of U.S. workers feel confident they’ll have sufficient funds to retire comfortably.
Consider this email that I received last week from a reader, in response to my January 17 article about imminent cutbacks to Social Security:
“We live on Social Security. That’s our main income, plus a little investment income. Is there anything else we can do?” — Jay A.
Jay, here’s another wealth-creating strategy you’ve probably never considered: start a home-based business or consultancy. By leveraging your experience, knowledge and contacts, you can generate a steady stream of income at any age, from any location.
In my various travels, I routinely cross paths with small business owners who are either colleagues or friends. And these days, they’re downright giddy about their prospects in the coming year.
As American entrepreneurialism awakens in 2017, one of the best investments you could ever make is the investment in you.
By offering your services as a paid consultant or freelancer in your particular field, you can supplement your other sources of income and get closer to your dream of financial independence.
I’ll provide a few guidelines in a minute. First, let’s examine the rising fortunes of small business and what it means for investors.
Small-cap “rockets” are set for take off…
Optimism among the country’s small businesses skyrocketed in December, as hopes for the economy increased in the wake of the 2016 presidential election. The National Federation of Independent Business reported this month that its gauge of small business optimism spiked 7.4 points last month to 105.8, the highest since the end of 2004, from 98.4. Most of the December improvement came from the “expectations” components of the index.
This data suggests that small companies are poised to soar in 2017, even as the broader markets pull back. Donald Trump’s plans to stimulate the economy through deregulation, tax cuts and infrastructure spending are music to the ears of small business owners. The share of business owners who say now is an opportune time to hire and expand is three times the average of the current eight-year expansion.
Jim Pearce, chief investment strategist of our flagship publication Personal Finance, says small-cap stocks are set for a stellar run in 2017:
“After seeking refuge in the strong balance sheets and generous dividends of large-cap stocks the past several years, investors are starting to sniff the air cautiously for new opportunities. It’s only a matter of time before they zero in on smaller, faster-growing companies.”
Another way to leverage the resurgence of small companies is to become one yourself, working out of your home.
A Brand Called “YOU”
As the analysts at Personal Finance point out:
“Caught between rising healthcare costs and potentially longer life expectancies, many older adults are phasing in retirement by turning consultant. Besides easing the transition to life on a fixed income, self-employment offers other financial advantages…
In fact, new business owners in general have more life experience than they used to. Nearly 26% of them were between the ages of 55 and 64…”
The rise of home-based businesses is transforming the economy. According to the Small Business Administration (SBA), about 28 million small businesses now operate in the U.S., employing 50% of the working population. Of those, more than half are home-based businesses and the SBA predicts that this number will increase by 64% over the next four years.
Many factors are fueling this trend, including the flexibility and empowerment of the Internet, the emergence of new technological tools for the self-employed, the non-conformism of Millennials, and the corporate downsizing of Baby Boomers who aren’t ready to go out to pasture. Through the 24/7 inter-connectivity of the Internet, you can turn yourself into a global “brand,” no matter where you live.
The first question: Should you incorporate, form a limited liability corporation (LLC), or operate as a sole proprietorship?
There’s no rush to take on the paperwork to incorporate or become an LLC, even if you’re already operational and making money. These two legal entities confer varying degrees of liability protection, so you can defer choosing until you reach one or more of these thresholds: you borrow significant money for the business; you take on one or more business partners; or you hire employees.
In a sole proprietorship, there is no legal distinction between the owner and the business. The owner receives all the profits (subject to taxation) and has unlimited responsibility for all losses and debts.
As our experts at Personal Finance explain, home-based entrepreneurs “typically start out as sole proprietors because it’s easy and uncomplicated: Simply hang out a shingle.”
In the meantime, keep these guidelines in mind:
1) The Home Office Deduction
You’ll be entitled to deduct a slew of business expenses; one of the most valuable is the home office deduction.
Although the deduction has a reputation as a hot zone for abuse and a red flag for the IRS, many accountants say scrutiny has become less stringent as more people conduct business remotely and set aside a portion of their homes for that purpose. To qualify for the deduction, your home office must only be used for work and serve as your principal place of business.
The IRS has two methods for calculating the deduction. The old method allows deductions for direct expenses, such as painting the office or buying a desk, as well as indirect expenses such as mortgage interest, utilities or repairs for the business portion of the home.
However, a simpler option sidesteps detailed record keeping with a straightforward formula that lets taxpayers deduct $5 per square foot of home office space, up to 300 feet. Try both methods to determine which one results in a higher deduction.
2) Income Limits Under Social Security
If you’re younger than full retirement age (66 for those born between 1943 and 1955), you can earn up to $15,720 this year without having Social Security benefits reduced. The government will deduct $1 of benefits for every $2 in earnings above that amount. If you are full retirement age or older, your benefits won’t be reduced no matter how much you earn.
Independent consultants have a bit of an edge. For employees, all wages count toward that $15,720 limit, but for the self-employed, only net earnings (gross income less business expenses) matter. And, the earnings limit excludes income from investments (including any interest), pensions or annuities whether you’re self-employed or not.
If you were born January 2, 1943, through January 1, 1955, then your full retirement age for retirement insurance benefits is 66. If you work, and are full retirement age or older, you may keep all of your benefits, no matter how much you earn. If you’re younger than full retirement age, there is a limit to how much you can earn and still receive full Social Security benefits.
If you’re younger than full retirement age during all of 2016, Uncle Sam will deduct $1 from your benefits for each $2 you earn above $15,720. If you reach full retirement age during 2016, the feds will deduct $1 from your benefits for each $3 you earn above $41,880 until the month you reach full retirement age.
3) Set Up a Self-Employed 401(k) Plan
For entrepreneurs looking to sock away as much for retirement as possible with minimum paperwork, the individual 401(k) is an expressway for beefing up savings. These plans work best for “solo-preneurs” with no partners and with no employees.
Under the plan rules, you can make deferrals up to $18,000 (in 2016 and 2017), plus an additional $6,000 if you’re 50 or older (in 2016 and 2017) either on a pre-tax basis or as designated Roth contributions. You can contribute up to an additional 25% of your net earnings from self-employment for total contributions of up to $54,000 for 2017 ($53,000 for 2016), including salary deferrals.
The above guidelines are by no means comprehensive, but they’re enough to get you on your way. Consult your accountant for customized advice (especially on taxes) that pertains to your particular situation. Got questions about becoming a solo-preneur? Send me an email: firstname.lastname@example.org — John Persinos
Schedule Your Weekly “Profit Paychecks”
Maybe setting up a business or consultancy isn’t for you. There’s another way to generate a a lifetime of income…
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