If there’s one message that’s driven into the minds of every working adult in the U.S. it’s to save for retirement (and start early! But that would be two messages). The exact amount one should have socked away by the time she or he hits their mid-60s or 70s varies depending on factors like earnings and spending habits. But one thing is certain, if you’re an independent contractor who does not have some type of investment working to multiply your cash, then you will hit retirement without much more than a social security check to your name, which should be extraordinarily worrisome.
Compared to other industries, real estate has one of the highest percentages of independent contractors. That means most agents and brokers do not have an employer to deduct taxes from paychecks and there’s no workplace-sponsored defined contribution pension account — also known as a 401(k) — in which an employer may match funds at a percentage of the employee’s monthly deposits. For a full-time and salaried W-2 employee, it can be a lot easier to pay yearly taxes and then stash extra earnings into long-term savings accounts or diversified funds. For 1099 workers, like 87 percent of REALTORS in Texas according to the National Association of REALTORS 2020 Member Profile, the only way to guarantee you have a comfortable retirement is by being your own financial advocate.
What does it mean to be a financial advocate? It’s not complicated. It means tracking your income, keeping debt as low as possible and saving a percentage of every paycheck. The first two items on this list are easy enough. And while saving money doesn’t sound difficult, what it actually entails is pinching off a percentage of every commission check and allocating the funds for an emergency, into a retirement fund, for bills, taxes due and to pay down debt.
It’s not uncommon for 1099 workers to get that “deer in headlights” feeling when researching retirement savings accounts. Some of them are income-dependent and others have a contribution cap. There are also accounts that are funded with post-tax income and others in which deductions are taken the year they’re made. Here is a quick rundown of different retirement plans that will help you get started.
A Roth IRA is funded with post-tax income. This fund has an income limit of $139,000 for individuals and $206,000 for couples. Contributions cannot be deducted from the account holder’s income taxes that year. However, when you withdraw the funds later, it’s 100 percent tax free. There is a contribution limit on Roth IRAs starting at $6,000 — or $7,000 at age 50.
If you earn too much for a Roth IRA, then consider a traditional IRA. It’s similar to the Roth in its contribution limit, but it differs in that you can deduct pre-taxed contributions from your income. Savings in this plan grow tax-deferred; but account holders are responsible for paying taxes when funds are withdrawn.
There can be limitations and penalties for withdrawing funds from an IRA too early. Not sure which one is best? According to Nerdwallet, “Most advice on the Roth IRA vs. traditional IRA topic begins with a question: Do you think your tax rate will be higher or lower in the future?”
Solo 401(k) plans are specifically designed for independent contractors. You can make larger tax-free yearly contributions to a solo 401(k) than with an IRA, which then lowers your annual tax bill even more. Of course, you will pay tax on that income later when the funds are distributed.
A SEP-IRA (Simplified Employee Pension plan) is an individual retirement plan with a high contribution limit — up to $57,000 of pre-tax income. At the end of the year, you can deduct 25 percent of your net income.
The biggest mistake financial advisors see — especially from commission-earning independent contractors — is delaying retirement planning because income is not yet where someone wants it to be, says Carly Michelle, a money coach in Austin. This is really common with younger workers across the board. But where real estate professionals usually hit a snag is when they have an off year. At those times, people are tempted to reduce their retirement plan contributions when instead they should be reducing extraneous expenses (like buying a new iPhone, eating out, and shopping).
Then there are what David Rust and Shane Moore from Quartz Financial in Austin call “multiple, mini, sudden-wealth events.” This is something most REALTORS experience throughout their careers and the Quartz Financial managing partners say it’s important to learn saving habits early so that you don’t squander opportunities to save during both periods: financial feast and financial famine.
But here is the main reason for saving for retirement early: compound interest. The person who starts depositing small amounts of income into a retirement fund in his or her 20s and stashes away more and more every year will have a larger retirement nest egg at the end of 40 years than the person who doesn’t begin saving a dime until his 40s, even if she or he contributes larger amounts of money. It’s basic math — and compound interest. Rust from Quartz Financial says “the most successful retirement plans start 30 years before your date of retirement.”
Rust from Quartz Financial says “the most successful retirement plans start 30 years before your date of retirement.”
Knowing where to begin retirement planning can feel overwhelming. Should you open an IRA? Or is it better to pay off debt first? Michelle, who’s been a financial adviser to young professionals for just under a decade, says “your first expense is saving money!” No matter the size of your paycheck or commission, 10-15 percent should automatically go into a retirement account. Step two should be aggressively paying down debt.
For real estate professionals, things can get more complicated when commission checks grow and come in more frequently. As a client’s wealth grows, Moore advises them to put money into a taxes-due account, into tax-deferred and tax-free buckets and make sure they have sufficient life insurance. “This is when it’s really helpful to have a financial team, an ongoing financial plan, a will, etcetera,” says Rust.
If these first steps of retirement planning gives you angst, there’s another route that is preferred by a lot of independent contractors in the earliest stages of portfolio management. Hire a financial planner or a personal money coach. Money management professionals help clients build financial portfolios, which includes creating an emergency fund and retirement plans and eliminating debt. Financial institutions also have robo-advisors. These services are low or no-cost computer algorithms designed to help middle and lower earners with less complicated investment needs build and customize a financial portfolio. A financial advisor will either charge a flat fee (roughly ranging from $1,000 to $3,000), an hourly fee (about $120 to $300), or earn a commission on your investments (about 3-6 percent). Financial planners who offer comprehensive money-management and investing services on commission typically have higher income requirements.
If there’s one big takeaway here it’s that Central Texas agents and brokers are in a unique position to increase income and save significantly for retirement, especially right now. According to a recent Austin Housing Market Report, “Home sales in the Austin area [have reached] new highs … outperforming almost every stat benchmark from 2019.” Median home prices and listings are up, homes sold have increased and average price for sold properties are 20 percent higher. It’s the perfect environment for bolstering income and positioning oneself for a very comfortable retirement. Now’s the perfect time, said Rust, “to build a foundation before you have to start worrying about what retirement looks like.”