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Saving for retirement when you’re self-employed

Posted by Shivali Anand

January 27, 2022    |     4-minute read (795 words)

Workers in the gig economy and owners of small businesses may have enviable flexibility and independence, but they also usually lack access to retirement plans and contributions enjoyed by regular, full-time employees.

So, how should a small business owner plan for retirement in the absence of a company-sponsored retirement plan? Financial instability is already one of the most challenging aspects of self-employment, so individuals who are contemplating working for themselves should undertake extensive financial planning ahead of time.

According to a Bankrate poll from 2021, 52% of American employees believe their retirement funds are inadequate. Another 16% are unsure if they're on track, while 21% feel they're exactly where they should be. Only 11% indicated they were ahead of schedule.

Meanwhile, according to Bloomberg Quint, wealthy business owners worldwide are reconsidering their retirement plans amid the COVID-19 outbreak. More than half of the 920 people and families, all of whom own businesses, polled by BNP Paribas SA and Aon Plc. indicated they're either postponing or phasing out of their firms, with 41% of those delaying or phasing out more slowly and 13% speeding up the process.

Retirement planning when you work for yourself

If you're self-employed, own a small business or work for a firm that doesn't provide a retirement plan, you can still take advantage of the essential tax benefits of retirement savings programs with an individual retirement account (IRA) or a simplified employee pension account (SEP-IRA). The ultimate goal of any eligible plan is to save for retirement while reducing taxes.

In general, you should aim to invest more when you're young, then progressively pare your assets to a more conservative mix as you approach retirement age. You can either manage your retirement funds on your own or hire a professional to do so.

Five phases of retirement preparation for the self-employed

1. When should you begin thinking about retirement?

The answer to the question is "now." The earlier you start saving, the more time your money has to grow. But it’s never too late to begin planning for retirement. Every dollar you save today will be worth more down the line. 

2. Determine how much money you'll need 


The amount of money you need to retire will be determined by your current income and spending, and how you anticipate those expenses changing upon retirement. According to most finance experts, your savings and Social Security should be used to replace 70% to 90% of your yearly pre-retirement income.

3. Rank your financial goals by importance


Your savings goals likely don’t apply only to retirement. Many people have other significant financial objectives, such as repaying debt or building an emergency fund. Ideally, you should save for retirement and your rainy day fund simultaneously.

4. Choose the best retirement approach for you

A crucial element of retirement planning is deciding how much money to save, as well as where to put it. There is no single best retirement strategy. It's most likely a combination of accounts. 

The self-employed and small business owners have five main choices: a solo 401(k), a SEP IRA, a traditional or Roth IRA, a SIMPLE IRA or a defined benefit plan (referred to by the IRS as a Keogh plan). Each of these types of plan has its own pros and cons

5. Decide on your retirement investments

Retirement accounts allow you to invest in stocks, mutual funds, and bonds, among other things. To decide on the ideal investment combination, you’ll need to consider how much time you have until you need the funds and how much risk you are ready to take on. 

By investing aggressively when you are young, you still have time to let your money weather market volatility, and a few rocky years won't wipe you out. If you're moving into self-employment, the list below should serve as a reminder that you still need to work on some aspects of your financial planning.

  • Have some money set aside. 
  • Learn how to budget for a potentially volatile income.
  • Get comprehensive insurance. 
  • Hire an accountant.
  • Separate your business and personal funds. 
  • Remember to factor in taxes.
  • Value the cost of your time.
  • Get financial planning advice 
  • Plan ahead for your retirement.
Conclusion

It can be tempting to put off saving for retirement with all the responsibilities of running your own business. But even if you can earmark only a small amount, saving for retirement from the get-go will pay off in the long run. If you wait until you are “financially comfortable,” you could be scrambling to get by in old age, need to work longer or make serious changes to your lifestyle. If you’re concerned about making a mistake, you can always meet with a fee-only financial advisor to plan your next steps.

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