Self Employed? Best Ways to Save for Retirement (Fidelity)

Saving for the self-employed
BY SARAH MAX,
— 03/24/11

Run your own business? Here’s help choosing the right retirement saving strategy for you.
Whether out of choice or necessity, the ranks of the self-employed are growing.

No matter what you call them—independent consultants, contract employees, entrepreneurs or just plain freelancers—self-employed people account for more than a quarter of those working in the U.S., according to a 2010 survey by Kelly Services, a human resources consulting firm, up from 19% three years earlier. While the trend was fueled by the recession, workplace experts say it's here to stay.

Working for yourself can mean more flexibility, greater job satisfaction and the potential for a bigger paycheck. What it doesn't offer is a neatly packaged bundle of benefits. That means the burden for saving for retirement falls solely on you.

There are plenty of options
The good news: There are ample opportunities for self-employed savers to sock away tax-deferred money. In fact, you have the potential to save even more on your own than you would working for someone else, says Brian Hogan, director of retirement product management for Fidelity Investments.


Before you dive headfirst into choosing a retirement account, though, make sure you've addressed such things as lining up health insurance and building your cash reserves. “You don't want to lock money in a retirement plan only to have to pull it out,” says Bill Losey, a certified financial planner in Wilton, N.Y.

Next, give some thought to your business. Do you have employees? Will you have some next year? And what sort of retirement benefits, if any, do you plan to offer? Some plans put the burden of saving for your employees’ retirement on you, the business owner, says Hogan.

The issue is complex, and can add a layer of administrative headaches. So it’s a good idea to talk with your tax adviser. The primer below outlines the key advantages and caveats of the various options for self-employed savers. Don't drag your feet though. Just because you don't punch in doesn't mean the retirement clock has stopped ticking.

SEP IRA
Available to self-employed workers and small businesses, the Simplified Employee Pension plan, or SEP, is essentially an IRA with bigger contribution limits. How big? For the 2010 and 2011 tax years, you can contribute up to 25% of your compensation up to a maximum of $49,000.

That limit is significantly higher than the $16,500 you could sock away in a company 401(k). “For ease of use, this is my favorite plan,” says Losey. “It's easy to open, there are no annual reporting requirements and you can adjust your contributions as you see fit.”

Advantage: You have until your tax-filing deadline to establish the account and make contributions, and you aren't obligated to make regular contributions to your account or your employees' accounts. For 2010, that means you can still set up a plan and make a deductible contribution by April 18; if you file an extension you may have until Oct. 15.

Caveat: If employees are in the picture, they can't make contributions to the plan, but you can contribute money on their behalf.

Solo 401(k)
A relative newcomer, the solo or self-employed 401(k) became available in 2002 and resembles the employer 401(k) plans most people know and love.

“Because of its familiarity, more people are leaning toward these plans,” says Cheryl Costa, a certified financial planner with AFW Advisors in Natick, Mass. You can contribute 100% of your compensation up to $16,500 ($22,000 if you're over 50) plus 25% of your compensation through profit-sharing for a maximum grand total of $49,000 a year.


Moreover, some plans allow participants to opt for Roth contributions, in which case they pay taxes now for the potential to save taxes later. Whether or not you go this route depends on many factors but it's worth a look. “Chances are you already have plenty of deductions as a self-employed person or business owner,” says Jerry Cannizzaro with Retirement Planning Services Inc. in Oakton, Va.

Advantage: The maximum allowed is the same as a SEP. But if your adjusted earned income is $82,500 or less, you'll be able to save more in a solo 401(k) than in a SEP, where contribution limits are tied to income and don't include profit-sharing. “If you have excess cash flow a solo 401(k) may be the way to go,” says Losey.

Caveat: If you have full-time employees you need not apply; plans are only available to self-employed individuals or companies with no employees other than spouses. Unlike the SEP, the plans do have annual reporting requirements.

Simple IRA
Available to self-employed workers and businesses with 100 employees or fewer, the plans are as easy to set up as the name suggests. The differences between a SEP and Simple IRA show up if you have employees. Unlike a SEP, where only employers can make contributions on behalf of their employees, these plans let employees save up to $11,500 ($14,000 if 50 and older) toward their retirement.

They also allow employers to make matching contributions of up to 3% of compensation or contribute up to 2% of each employee's salary, up to $4,900. If you are a self-employed individual or owner of the company you can effectively match your own savings. But if you match your own savings you'll be required to do the same for your employees. And once you start making contributions, says Costa, you may be required by law to continue with that match.

Advantage: If you have employees, a Simple IRA allows them to make their own contributions to the plan.

Caveat: Contribution limits are significantly lower than those for the SEP or the solo 401(k).

Keogh
Introduced in the 1960s as the original self-employed retirement plan, Keoghs went out of vogue with the introduction of the three plans mentioned earlier. These days the term Keogh generally is used to describe two other types of individual retirement plans, profit-sharing plans and defined-benefit plans. Both can be a hassle to set up and to maintain, requiring a plan document and annual report.

With profit-sharing plans, which are based on a percentage of income and capped at $49,000, it's probably not worth it. But if you're looking to play catch-up for retirement and have the cash to invest, a defined-benefit plan may be worth checking out, says Costa. The reason: You can put up to $195,000 a year in a defined-benefit plan — but your actual contribution is based on an annual actuarial calculation that takes into account things like your income, years to retirement and projected returns.

Advantage: Potentially huge — up to $195,000 — in contribution limits.

© 2008-2011 Fidelity Interactive Content Services LLC. All rights reserved.

Smart Grid Technology (Business Week)

Smart Grid Technology October 5, 2009, 8:18PM EST The Coming Energy Revolution
Smart-grid technology will bring huge savings to companies as varied as Cisco, PG&E, and Cargill, and to consumers, too. But who will foot the bill?
By Rachael King

Food producer Cargill is taking a carving knife to its electricity bills. At a plant in Springdale, Ark., where the company handles about 50,000 turkeys a day, electricity bills run more than $2 million a year. But Cargill thinks it can cleave $680,000 from the total by using its own generators on high-demand days.

The secret behind this money-saving plan lies in what's known as the smart grid—a wholesale revamp of the system that distributes energy to homes and businesses around the country. Government bodies and utility providers are in the early stages of this multibillion-dollar upgrade to transform the existing grid into a two-way network where power and information flow in both directions between the utility and the customer, not just from the provider to the user.

Done right, the revamp will cut bills, reduce consumption, give users more say in the kinds of energy they use, and even let customers produce their own energy and sell it back to power providers. "What's going to happen with the smart grid is that we're going to create a network that's larger than the Internet," says Guido Jouret, chief technology officer for the emerging-technologies group at Cisco Systems (CSCO), one of the many companies working on the technology needed to modernize the electric grid.

A $20 Billion Market in Five Years
The Electric Power Research Institute, a nonprofit research and design group, estimates that it will cost $165 billion, or roughly $8 billion a year for 20 years, to create the smart grid. The market for the gear needed to overhaul smart-grid communications alone may reach $20 billion a year in five years, Cisco estimates. Other technology companies developing smart-grid software and hardware include IBM (IBM), Oracle (ORCL), Google (GOOG), and Siemens (SI).

The tech sector's interest is fitting considering the similarities between the energy-grid upgrade and the computing revolution of the 1980s that saw hulking, centralized mainframes give way to PCs. The existing U.S. power grid dispenses electricity but is limited in its ability to gather intelligence from end users—hence the monthly visit from a meter reader. Now utilities are replacing outmoded meters with so-called smart meters that foster a back-and-forth between customer and utility. In much the same way PCs opened the door to third-party software and services and use of the Internet, smart meters are paving the way for tools and services that make the system more responsive to shifts in energy demands.

Cargill is counting on smart-grid tech to lower its bills. Many utility vendors set rates for industrial customers based on peak-use patterns. So in a common practice known as peak-shaving, Cargill taps its own generators to keep its 365,000-square-foot Springdale plant cool on summer's hottest days rather than use energy from its electricity vendor, PowerSecure (POWR). The challenge is determining when peaks occur. PowerSecure keeps close tabs on Cargill's generators, as well as fluctuating electricity prices, and when it can tell that rates are on course to pass certain preset thresholds, it fires up Cargill's generators remotely.

Easier to Opt for Solar or Wind
In the future, Cargill may choose to run its generators more often and sell power back to the utility when prices are high, says PowerSecure CEO Sidney Hinton. While Cargill's utility provider doesn't currently purchase energy generated by customers, other utilities, including PG&E (PCG) in California, have begun buying solar energy generated by customers on corporate campuses and residential rooftops.

Another benefit is that customers may soon get more leeway in determining the nature of the power they purchase, more easily opting for renewable energies such as solar and wind, says Matthew Trevithick, a partner at venture capital firm Venrock. Companies that are actively trying to cut their carbon footprints, such as Coca-Cola (KO), may be able to specify the percentage of renewable energy they buy, opting to pay more for wind, for example, if it helps them meet go-green targets.

But questions abound over who will foot the bill for the grid's modernization. The American Recovery & Reinvestment Act has allocated $4.5 billion in grants and loans through the Energy Dept. for the smart grid to enhance security and to ensure reliability of the electric grid to meet growing demand.

What of the remaining costs? Often, capital improvement expenses are passed along to customers. Before that, though, utilities need a green light from state regulators. "Certain states will go first because of cost," says David Leeds, an analyst specializing in the smart grid for Greentech Media. For instance, he says that in California, electricity costs 15¢ per kilowatt hour, compared with about 5¢ in Georgia.

Discounts for Lower Peak Usage
California utilities are leading the way in smart-meter installation. Northern California's PG&E is the leader, spending $2.2 billion to deploy 5.4 million smart meters, according to a Greentech Media report. Southern California Edison is No. 3, spending $1.63 billion on 4.8 million smart meters. (Columbus (Ohio)-based American Electric Power (AEP), with a goal of installing 5 million meters, lands between the two California utilities.)

Utilities stand to benefit from smarter-grid technology, too—particularly during high-demand periods. When demand for electricity exceeds supply, such as on hot summer days when air conditioners are running, utilities must find additional power or potentially face blackouts. Some are forced to tap expensive, natural gas-burning power plants that are kept for just such a purpose. Alternatively, utilities can buy power on demand from the spot market. The problem in either scenario is that rates charged for electricity remain constant even when the cost of supplying it can surge. As a result, utilities may lose money on hot days even though consumers are using more power.

Many utilities have encouraged consumers to voluntarily engage in energy efficiency, but changing consumer behavior can be challenging. For example, Southern California Edison has used the slogan "Give your appliances the afternoon off" for decades to try to get customers to reduce the strain on the grid from 2 p.m. to 7 p.m., when millions of customers turn on large appliances such as clothes washers and dishwashers. While energy-efficiency programs have helped reduce consumption, the utility stands to make even bigger gains with the installation of smart meters.

Plants Can Keep Going During Storms
But as information on usage is extended further to the residence or business, customers will be able to see just how much energy their lighting, air conditioning, and appliances use. "The idea is that electricity costs more at peak-demand times, so if you showed those pricing signals to people, they can choose to shift usage to off-peak times," says Jeffrey Taft, global smart-grid chief architect at Accenture (ACN). The smart grid will also give utilities the ability to automatically turn down business and consumer appliances on peak days. Customers would probably be given some sort of discount in exchange for letting the utility cut power to certain systems at key times of the day.

In Springdale, Ark., the local utility once faced a high-demand day and called and asked Cargill to fire up its generators and separate from the grid—and paid the company to do so. "In the long run it netted out a lower cost for us," says Cargill Engineering Manager Jim Edwards. Those generators have come in handy at other times, too. When there was a big ice storm in Northwest Arkansas this past winter, Cargill ran the generators for six days straight to keep producing turkey meat. "We were the only facility in this area to continue processing products," says Edwards. "If the plant had been closed for those six days, it would have lost about $1.2 million."

King is a writer for BusinessWeek.com in San Francisco.