Preparing Financially to Go Solo
I haven’t touched on the self-employed and owning your own business angle in my Career & Money series yet, but it is a topic near and dear to my heart. That’s why I was so excited to listen in to Pam Slim’s Escape from Cubicle Nation’s recent podcast with Lynette Khalfani. In this hour long broadcast they touched on a myriad of topics about preparing financially for the move from employee to entrepreneur. I highly recommend you listen to the complete interview if you even have an inkling about escaping from the land of cubicle dwelling.
She touched on three topics that were eye opening to me: retirement planning for the self-employed, insurance, and medical benefits. Aside from actually making a living, these three items are often the excuses would-be entrepreneurs use for staying “stuck” in the life of the corporate halls.
Let me attempt to summarize what I learned from listening in. While you can’t beat a hefty company match in your 401K, if you are self-employed it is imperative that you don’t let retirement planning go by the wayside. While I had heard of a SEP Plan before (it is essentially an IRA based retirement plan for self-employed folks), I had never heard of the term “Solo 401K Plan” which Khalfani talked about. A Solo 401K is available to owner(s) of a business in which there are no employees. Some benefits are that it offers higher contribution limits than many other small business retirement plans, has a provision for loans, and has low paperwork requirements. The very cool thing is that you can even open one of these if you are working full time but have a side business(perfect for those in transition). This could be a great way to contribute more money (within IRS guidelines of course) while working for someone else and/or a way to stash more cash before you go out on your own.
Disability and life insurance. Hurray, someone finally talked about disability insurance with respect to going out on your own. Often I hear all sorts of financial and benefits related things, but never anything about disability insurance. Let’s face it the odds of becoming disabled (temporarily or permanently) are far greater than your odds of dying at that same age. Yet, people rarely talk about it. Check out this article on all kinds of insurance to learn more. Khalfani recommends that all would-be entrepreneurs secure both disability and life insurance BEFORE leaving your current job. You never want to let these types of things lapse and even switching coverage can be troublesome once you leave an employer because depending on the circumstances, you have to prove health, insurability, income stability, among other things.
Good old medical benefits. We’ve had lively discussions on this topic here before and the discussion gets livelier for people looking to go out on their own. In my opinion having medical insurance isn’t optional, it is a requirement for protecting your health and financial well being. With medical benefits shrinking and vanishing in Corporate America, medical benefits are no longer what they were. That is the good and bad news. It is still expensive to buy them on your own but there are options to do it as economically as possible. Besides buying a group policy through some group (think alumni associations, professional associations, etc.) one way to make it work efficiently is using a combination of a HSA (Health Savings Account) and a high deductible insurance plan.
A HSA is basically a vehicle for saving for future qualified medical expenses on a tax advantaged basis. While you fund it yourself, you get a tax advantage and a lump sum stashed away for when you need it. A high deductible insurance plan is just what it says — medical insurance with a high deductible in exchange for a manageable monthly cost. The good news is you cover yourself for catastrophes and major medical needs; the bad news is most routine and preventative care is out of pocket. Read the fine print, however, as there are numerous articles out there about the potential high risk of high deductible plans.
Every time I listen or read about these topics as it relates to self-employment, I get a little larger headache. It is overwhelming and just when I think I have the answer I stumble across these cautionary tales in the news. The bottom line is to do your research and enlist the help of experts and others who have been there/done that. As always, keep in mind our unique needs as an LGBT person as it relates to covering a partner or ensuring they receive death benefits on your life insurance.