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Retirement planning guide for self-employed champions

21 November 2022

4-minute read

Saving Plan Well Feature

Retirement planning requires creating a budget to manage your money and savings and progressively track your spending patterns. (Credit: Getty Images)

If you're self-employed, retirement planning can be a unique stressor because it entails commitment and time, something you're short of when you’re busy running a business. But keep putting it off, and you could miss out on the opportunity to build financial freedom in the future.

Saving two decades' worth of income can be challenging. But crafting your pension plan protects you from rising healthcare costs, maintains your standard of living and lets you pursue passions. You deserve to enjoy the rewards of your hard work.

Here are six ways to prepare for your financial security during retirement.

1. Set a retirement savings goal

Your savings goal considers your lifestyle now and in the future. For example, you may want to travel or relocate in retirement. But don't forget expenses for housing, food, transportation, entertainment and most importantly, healthcare. How much will you need to accomplish what you want to do and maintain a comfortable lifestyle?

Bola Sokunbi, the bestselling author of Clever Girl Finance books, provides this formula to determine retirement savings. (Life expectancy in the Asia-Pacific region is 74 years.

Living expenses amount + retirement goals amount x 12 months x 20 years = retirement savings.

Don't forget to account for the inflation rate when setting savings targets.

2. Find a sustainable saving strategy

Savings strategies depend on your financial situation. But the crucial step is to keep saving consistently. Set a timeline for your savings goal and increase the amount whenever possible.

One saving strategy is the "one-third" method. Whatever you have earmarked for savings, one-third goes to debt payment, one-third to an emergency fund and a third to retirement savings. The debt and emergency fund budgets go into retirement savings once you've achieved their financial targets.

Financial experts advise setting aside 10 per cent of your income in the beginning but push the figure to 20 per cent or more if you start saving late.

3. Invest your savings

Putting your savings in different types of investment minimises risk. (Credit: Getty Images)

Savings in a bank is good, but low-interest rates mean you can never earn more than the money you deposited. Rising inflation also erodes the value of your savings in banks.

The opportunity to earn is higher in investing but not guaranteed. For example, government bonds generally do well. But high inflation rates result in declines in both bonds and stocks. So, your asset allocation is crucial to help cushion blows.

Conduct a pre-financial investment checklist with certified financial planners. They can recommend investment products that suit your risk tolerance.

4. Prioritise retirement insurance that earns

Life insurance policies with a savings or investment focus are another way to make your savings earn. Some plans accumulate cash value with the possibility of earning interest over time.

For example, life insurance can come with an annuity, an investment product that guarantees additional retirement income. You get an option to receive the money in a lump sum or monthly payments upon retiring. Annuities may also have tax and social security benefits.

Talk to your insurance advisor and ask how your current policy can become a source of retirement income.

5. Grow your savings with income-generating assets

Retirement does not always mean the absence of work. Some people see themselves working part-time or pursuing passions. (Credit: Shutterstock) 

Look for ways to turn your assets into a passive income stream. For example, rent out a second property or extra space. To further maximise your earning potential, get paid to put an advertisement on your car or lease machinery or equipment you don't regularly use.

Another passive income idea is to earn compound interest in a high-yield savings account. While the income won't be much, a savings account carries less risk than investments like stocks.

Try a time deposit account, which earns above-average interest rates. Since early withdrawal incurs a penalty, it's extra motivation not to touch the account. For more cash deposit flexibility, ask your bank about savings products that provide bonus interest when there are no withdrawals for a specific period.

6. Determine your withdrawal rate during retirement

Instead of withdrawing everything you've earned once you retire, set a withdrawal rate to ensure you don't run out of money during your retirement.

Sokunbi recommends using the four per cent rule to determine the withdrawal rate and keep money flowing in.

"For example, if you know you can comfortably live on US$40,000 a year in retirement, then your goal would be to save US$1 million for retirement. So that as you withdraw four per cent on an annual basis, your account balance will remain relatively steady as your investments continue to make money," Sokunbi writes in her book Clever Girl Finance: Grow Your Money.

The ideas here hopefully get you into the habit of saving and investing if you haven't already started. Seek the counsel of a certified financial planner if you need help figuring out your financial situation as a self-employed individual. Retirement planning is never too early or too late when a financially secure future is on the line.

A "scarcity mindset" may be preventing you from achieving goals. In this episode of AIA Voices, finance experts Anna Haotanto and Lachlan Campbell, with AIA Ambassador Nico Bolzico, explain how this way of thinking prevents financial wellness. Watch as they share tips to put you on the path to financial freedom.

AIA Voices is a community of influential and educational voices from around Asia to talk about life, health and wellness. A platform to educate, motivate and inspire people to make positive behavioural changes on their health and wellness journey. Providing an opportunity for communities across Asia to connect, collaborate, and learn from each other. Designed to drive AIA One Billion, our ambition to engage a billion people to live Healthier, Longer, Better Lives by 2030.

References:

World Health Organization. Global Health Estimates. [online] [Accessed on 19 July 2022]

Money Matters, University of Wisconsin-Madison. Retirement Planning Basics. [online] [Accessed on 19 July 2022]

John Wiley & Sons, Inc. Bola Sokunbi. 2021. Clever Girl Finance: Grow Your Money. [online] [Accessed on 26 August 2022]

Disclaimer:

This is general information only and is not intended as financial, medical, health, nutritional or other advice. You should obtain professional advice from a financial adviser, or medical or health practitioner in relation to your own personal circumstances.