Retirement Planning for the Self-Employed

Introduction 2

Take Stock of Your Present Situation 2

Retirement Benefit Plans for the Self-Employed 3

Common Retirement Planning Errors 5

The Retirement Obstacles Created by Self-Employment 7

Advantages of Being Self-Employed 8

Conclusion 9


If you are employed by a company, one of the perceived disadvantages of self-employment is the lack of benefits, especially those involving retirement. Those who are self-employed often bemoan the lack of retirement plans and benefits available to them.

However, there are many retirement benefits available to those who work for themselves. In some cases, these benefits are better than those provided by some of the biggest employers in the United States. There are also some retirement planning advantages when you’re self-employed.

Planning for your retirement can be a little more challenging if you’re self-employed, but there are many great options available to you!

Take Stock of Your Present Situation

Everyone’s financial situation is different. Understanding your starting and ending points will permit you to make more advantageous decisions. Many business owners fail to consider these items early in their careers.

Ask yourself the following questions to gain a better understanding of your financial situation and future needs:

  1. How much is my net worth? People are frequently obsessed with “net worth.” While it isn’t the only concern, it is one measurement of financial health.
    • The process of calculating your net worth is one of the most revealing financial exercises you can do because it forces the examination of your debts, assets, and the allocation of both. A detailed net worth analysis can reveal a lot about your financial habits.
  1. What are the major expenses I face between now and retirement? Some of these major expenses might include paying off a mortgage, funding higher education, and perhaps footing the bill for your daughter’s wedding. Of course, there are cars and vacations, too.
    • Be sure to consider the possibility of unplanned expenses. Medical costs in the US are the highest in the world. Even minor operations can cost over $10,000.
  1. What will my expenses be at retirement? Is your intention to have your home paid in full by the time you retire or will you still be paying it off? Will you be downsizing and paying rent?
  2. How much do I have invested? Some families have a high net worth, but it isn’t invested effectively. You might have an extremely expensive painting hanging on your wall, but is that the best use of your money? In most cases, the more money a family has invested, the better off they will be when retirement arrives.
    • A million dollar home might be a great investment in certain parts of the country. But the stock market has a long history of returning an average of over 10% annually.
    • Ask yourself if your money is invested wisely.
  1. How much debt am I carrying? Debt is more insidious than most individuals realize. It’s like running a marathon against the wind. When you have debt, it’s constantly subtracting from your financial growth and future.
    • Most forms of debt are at a higher interest rate than most investments pay. This is another way of saying that paying off your debt is a better investment than an actual investment!
    • A lack of savings or income is one of the biggest determining factors of when you can retire. The other is the amount of your debt. Any debt you have at retirement will still need to be paid.
  1. Would I still like to earn money during my retirement? For some, retiring means lying on the beach all day. But others would prefer to work in a modified fashion. That typically means part-time in a new, fun, or rewarding capacity.
    • Even a part-time job can make a huge difference. Just $10/hour at 20 hours/week might be enough to make a mortgage or rent payment each month. If your housing is already paid for, it can go towards food and utilities.
    • If your retirement planning is looking a little grim, a part-time job can turn the numbers around!

How does your situation look? Do you have retirement goals, and are you on schedule to meet them? It’s challenging to plan for the future if you’re struggling to keep the lights on. Avoid falling into that trap by taking a good, hard look at your financial situation. It’s difficult to reach your destination if you don’t know where you are now.

“The trouble with retirement is that you never get a day off.”

-Abe Lemons

Retirement Benefit Plans for the Self-Employed

Sure, your friends that work for big corporations have fancy benefits and 401k plans that their companies match. You might think you’re limited to an IRA plan and a savings account, but nothing could be further from the truth. The government is looking out for you.

There are many options available to the self-employed that can match up quite well to those of your friends in the corporate world.

Consider these retirement plan options:

  1. Simplified Employee Pension IRA (SEP IRA). This is likely to be the best option for many, especially if you’re a one-person operation. With a SEP IRA, you can sock away up to 25% of your net earnings! There is a limit of $52,000 for 2014. These can be set up at nearly any bank.
  • The fees are extremely low!
  • The money and the earnings are sheltered from taxes. The money is taxed at withdrawal, similar to a conventional IRA.
  • This is actually better than a conventional or Roth IRA, because the contribution limits are much higher.
  1. Savings Incentive Match for Employees (SIMPLE IRA). This option is similar to the SEP IRA, but requires that you match any contributions made by your employees, up to 3%. The matching rules are complicated, so investigate them. The maximum contribution is $12,000.
  2. Individual 401(k). This is also referred to as a Solo 401(k). This is very similar to a Traditional IRA, but it’s only for sole proprietors. That means you aren’t allowed to have any employees, except your spouse.
  • Contributions are tax-exempt. Taxes are only paid when the money is withdrawn.
  • This is a great way to save a lot of money for retirement. With an individual 401 (k), you can contribute money as both an employer and an employee.
  • The limits are $17,500 ($23,000 if you’re over 50 years old), and an additional 25% of income as an employer. The total contributions cannot exceed $52,000 (if over 50 years of age). With a spouse, it’s double!
  • You can begin withdrawing the money at age 59 ½. If you take an early withdrawal, there’s a 10% penalty. However, there are some exceptions. Money can be withdrawn early, without penalty, for several reasons. These reasons include purchasing a first home, paying for higher education, sudden disability, and the prevention of foreclosure or eviction.
  1. Roth Individual 401(k). This is simply the Roth version of the individual 401(k). So you’d have to contribute after-tax money. However, no tax is due when the money is withdrawn.

“I found out retirement means playing golf, or I don’t know what the hell it means.

But to me, retirement means doing what you have fun doing.”

– Dick Van Dyke

Common Retirement Planning Errors

One great way to increase your odds of success in any endeavor is to simply avoid the obstacles that make success more elusive. Anticipate your missteps, so you can seek to eliminate or avoid them altogether.

Are you making any of these retirement planning errors?

  1. Failing to invest consistently. If you want to see your retirement savings grow, it’s important to continue saving and investing each month. Those who are self-employed often lack a consistent income. This can make regular saving more difficult, but even more important. When you have the income available, be sure you’re planning for the future.
  2. Entering retirement with too much house. While many couples downsize after the children leave, many remain in a larger home. This can be a bad idea. While real estate does appreciate, the rate of the appreciation is usually much lower than stock market returns over time.
  • If possible, get rid of your big house and put the extra money into your retirement account.
  1. Starting too late. Time is perhaps the most powerful variable in retirement planning. If you haven’t started yet, today is a great time to start working on your plan.
  • If you have some lucrative early years, it’s especially important to take advantage of them when you’re self-employed.
  1. Ignoring taxes and inflation. We’re all guilty of playing with those savings calculators, and getting excited by the numbers we see. Even in a tax-deferred account, taxes will still have to be paid sometime. That fantastic balance you see at the end of the rainbow is usually only partially yours.
    • Inflation is the other value killer. Since 1913, inflation has averaged 3.22%. If your stocks average 10% each year, in most cases you’re only looking at 6.78% net, before taxes!
    • Ensure that you’re taking advantage of tax-deferred accounts as much as possible, so you’re only taxed once! With a regular brokerage account, you’re using after tax money, and you’ll be taxed on the profits, too.
  1. Relying too much on social security. The long-term health of the social security system is questionable. While it can be a great supplement to retirement, you ought to have other plans.
  2. Underestimating retirement spending. Many retirees are surprised at how much money they spend after retiring. But if you really think about it, it’s not surprising. It’s very challenging to spend less during your later years.
    • Those that are self-employed usually work very hard. The hours are long, and you’re probably exhausted at the end of the day. In many cases, you may lack the time to go out to eat, hit the movies, or take many vacations.
    • When you’re retired and finally have some free time, are you just going to sit around the house? You probably want to play golf, go out to lunch, and do some traveling.
    • It’s very easy to spend more in retirement than when you’re working 40+ hours per week.
  1. Lacking a good mix of investments. Interest rates are currently very low, which means that fixed-income investments aren’t paying much. Can you ensure these safe investments will be better in the future?
  • Historically, retirees were told to have 80% of their investments in bonds. Experts are now saying that 50% is probably a more fitting number.
  1. Overestimating how long you’ll be able to work. Many people assume they’ll be able to work into their 70’s.
  • Can you be sure your health will permit it and will your skills still be relevant?
  • Working as long as possible might sound like a good idea now, but will you feel the same way in the future?
    1. Underestimating health care costs. It’s very typical for retirees to have health care expenses that can run $250,000 beyond what Medicare covers. Remember that Medicare doesn’t cover dental, vision, or hearing issues.
  • Most retirees underestimate health care costs, so be realistic in your assumptions.
    1. The inability to determine how long you’ll live. The average life span is close to 80 years for both men and women. If you’re 45+ years old now, your life expectancy is in the mid-80’s.
  • Did you know that if a couple retires at age 65, there’s a 50% chance that one of them will live into their mid-90’s?
  • Will your retirement income last as long as you live? Think about it. If you retire at age 65 and one of you lives to be 95, that’s 30 years. You probably only worked for roughly 40 years. That’s a lot of years to support.

Avoiding these missteps will help ensure that your retirement is well-funded and enjoyable. How many of these slipups are you currently committing? What is your plan to rectify the situation? How are these decisions impeding your retirement planning efforts?

“Wisdom and penetration are the fruit of experience, not the lessons of retirement and leisure. Great necessities call out great virtues.”

– Abigail Adams

The Retirement Obstacles Created by Self-Employment

When it comes to self-employment, there are many advantages. However, there are also some disadvantages. With some self-discipline, many of these disadvantages can be avoided.

Are any of these obstacles impeding your ability to prepare for your retirement?

  1. Putting off saving for retirement. Most of the self-employed realize that retirement planning is an issue. In the early years, it’s common to struggle or believe that the best investment is to reinvest in your business.
  • Saving in the early years is much more critical than later on due to the power of compounding. Use a savings calculator and see for yourself. Saving diligently from age 22 to 30 results in more retirement money than saving from 30-65.
  • If you save $300 per month for 10 years at 10.5% interest, you’ll have approximately $63,000. If you then stop saving and simply leave the money alone for the next 33 years (age 32-65), you’ll end up with over $2 million!
  • However, if you start saving $300 per month at age 32 and save for the next 33 years, you only end up with roughly $1 million.
  • Those first 10 years are worth twice as much as the next 33! Think about that.
  1. Saving for retirement requires more discipline. Perhaps the best part of corporate benefits is the automation. You can fill out a simple form, and a portion of your paycheck is sent off to your retirement accounts before you can get your hands on it. Out of sight, out of mind. Those that are self-employed lack that advantage.
    • The self-employed are much more likely to have the following mindset: “I’ll pay all my bills, have a tiny bit of fun, then I’ll save the rest.” This hardly ever works. Your expenses will tend to expand to match the amount of money available.
    • The solution is to pay yourself first. This is a common theme, but it’s especially important for the self-employed.
    • Although it’s challenging, take a portion of every paycheck and set it aside. Refuse to touch it for any reason. At the end of the month, send the money off to your retirement fund.
  1. A lack of expert financial help. Those who are not self-employed have access to their HR departments, who are versed in explaining benefits. In many cases, the mutual fund company that supports the 401(k) program will also come out to give yearly presentations and field questions. Some companies even provide free access to financial planners for their employees.
    • If you’re on your own, you likely lack this process. Fortunately, there are many great books on retirement planning and investing. There are also many experts available, although consulting them could get costly.
    • With a little diligence, you can overcome this disadvantage.
  1. Inconsistent income levels make it challenging to plan. When you have conventional employment, your salary is set and isn’t likely to drop, unless you get fired. Being self-employed, you probably have a lot less consistency.
    • Because of the potentially large income swings when you’re self-employed, it’s important to save whenever the opportunity presents itself. If you’ve had a few challenging years and then things suddenly turn around, most people want to spend some money and enjoy themselves. Avoid this temptation.
    • Just remember that you’re saving for more than just this year. You’re also saving for the last few years when you couldn’t save much.

Although self-employment poses some challenges with regards to retirement planning, there are some solutions. It’s simply a matter of getting started ASAP, investing regularly, getting the information you require, and saving whenever you can.

“Financial literacy is an issue that should command our attention because many Americans are not adequately organizing finances for their education, healthcare, and retirement.”

– Ron Lewis

Advantages of Being Self-Employed

Even though it can be challenging at times, there are also many advantages to being self-employed when planning for retirement. The key is to make full use of them when you can.

Use these tips to your full advantage if you’re self-employed:

  1. You can catch up much easier than most. Your income inconsistency isn’t necessarily a bad thing. You can also have really good years that can allow you to save a lot more than others.
  • There is a better opportunity to greatly increase your income. A bachelors-level chemist making $45,000 per year is likely to be making a similar salary 10 years from now, with only small annual increases.
  • Many self-employed individuals don’t have the same limits. You could potentially grow your business and make 10x or 100x more than that chemist.
  • With some luck and hard work, it isn’t difficult to retire with a large nest egg.
  1. You have many tax advantages. One of the best things any business owner can do is to get expert advice regarding business taxes. Buy a book or seek the advice of a corporate accountant. If you think creatively, it’s possible to write-off nearly anything even remotely tied to your business. Ensure that you’re getting all the tax deductions available to you.
    • It’s often said that a business owner making $50,000 can live like he makes $70,000.

These two advantages can make a huge difference in your ability to prepare for retirement. Are you doing all you can to reap the benefits?

“Many seniors understand that Social Security is social insurance as opposed to a program where we put money aside for our own retirement. But most elderly individuals think they’re getting their money back. So it isn’t selfishness as much as a misunderstanding.”

– Richard Lamm


Being self-employed has both advantages and disadvantages in retirement planning. Take the time to ensure that you’re doing all you can to manage both. Life for the self-employed tends to be busier and more hectic. It’s easy to fall into the trap of putting off saving for retirement. While it’s possible catch up, it’s easier to not get behind in the first place.

Retirement planning is important for everyone, regardless of your employment status. Most of these retirement planning faux pas are common to all employment types. All of us are bound to take some financial missteps. But hopefully, we can avoid making them when it comes to retirement. Start saving today, and maximize your retirement nest egg!

“Preparation for old age should begin not later than one’s teens. A life which is empty of purpose until 65 will not suddenly become filled on retirement.”

– Dwight L. Moody