When you work for yourself, you get to call the shots. You choose your hours, your projects, and even your dress code (yes to sweatpants). But here’s one choice that often trips self-employed folks up: setting up a solid retirement plan. Without the convenience of an employer-sponsored 401(k), the responsibility to save for your future lands squarely on your plate. And while that can feel overwhelming, it doesn’t have to be.
If you’ve been avoiding retirement planning because it sounds too complex or you’re not sure where to start, you’re in the right place. This guide will walk you through the strategies, tools, and mindset shifts you need to create a retirement plan that works for you.
Why Retirement Planning Is Essential for the Self-Employed
Did you know? Starting at age 30 and contributing just $500 a month to a retirement account earning 7% annually could give you over $600,000 by age 65. Start ten years later, and that number drops by nearly half.
Being self-employed also means you won’t get automatic contributions from an employer, so it’s up to you to be proactive. By learning how to maximize the tools at your disposal, you can build a secure and flexible retirement plan on your own terms.
Step 1: Understand Your Options
Retirement planning for the self-employed is more diverse than you might think. You have several account types to choose from, each with its own perks and quirks. Here’s a rundown of the main options:
1. Traditional and Roth IRAs
Good news for freelancers or gig workers just starting out! Individual Retirement Accounts (IRAs) are accessible and straightforward.
- Traditional IRA contributions are tax-deductible, which lowers your taxable income now, but you’ll pay taxes when you withdraw later.
- Roth IRA contributions are made with after-tax dollars, meaning your money grows tax-free, and withdrawals are tax-free in retirement.
The main downside? Contribution limits are relatively low ($7,000 per year in 2024, or $8,000 if you’re over 50). That said, IRAs are an excellent starting point, especially when you’re establishing the habit of saving.
2. SEP IRA
A Simplified Employee Pension (SEP) IRA is like a traditional IRA but designed for small business owners and self-employed individuals. You can contribute up to 25% of your net self-employment earnings or $66,000 annually (2023 limit), whichever is less.
Why it’s a win? High-income earners or those with sporadic cash flow love the flexibility. Contributions are tax-deductible, and you’re not locked into contributing every year.
3. Solo 401(k)
If you’re running a one-person operation, the Solo 401(k) could be your retirement MVP. It allows you to contribute both as the employee and the employer. That means higher contribution limits, up to $66,000 annually in 2023, or even $73,500 if you’re over 50.
Additionally, Solo 401(k)s can include Roth options, giving you both pre-tax and after-tax savings flexibility. The catch? There’s slightly more paperwork compared to an IRA, but the higher contribution potential often makes it worth it.
4. Defined Benefit Plan
Got big ambitions for saving? A Defined Benefit Plan lets high-income earners set aside significant amounts—even in the six figures. It’s structured like a pension, and your contributions are based on the benefits you want in retirement. However, these plans are more complex and require professional management, which could come with additional costs.
If you’re torn between options, start with an IRA and grow into a Solo 401(k) or SEP IRA. You don’t have to have everything figured out to begin.
Step 2: Budget for Your Future
Saving for retirement starts with understanding your financial picture today. If you’re self-employed, income can be inconsistent, and that’s okay. The key is to start small, automate when possible, and increase contributions as your income grows.
Prioritize Retirement Contributions
Treat retirement savings like a non-negotiable expense. One strategy that works well? Paying yourself first. Before you allocate funds to business expenses or personal luxuries, set aside a percentage of your income for retirement. Many self-employed people aim for 15–20%, but even 5% to start is better than nothing.
Emergency Fund First
Before maxing out retirement accounts, make sure you have an emergency fund. Experts recommend saving 3–6 months’ worth of living expenses to cushion against income gaps or unexpected costs.
Step 3: Make Your Money Work Harder
Contributing to a retirement account is step one. Step two involves deciding how to invest that money. The beauty of retirement accounts lies in their ability to grow your wealth through compounding, but this only happens if you actually invest the funds.
Diversify Your Portfolio
“Don’t put all your eggs in one basket” isn’t just an old saying; it’s sound investment advice. Diversification means spreading your investments across different asset classes like stocks, bonds, and funds to minimize risk.
A popular route for beginners is to use low-cost index funds or target-date funds, which automatically adjust your investment strategy based on your anticipated retirement year.
Keep Fees in Check
High fees can chip away at your long-term savings. When choosing funds, pay attention to expense ratios (the annual fees for managing the fund). Even a difference of 1% can cost you thousands over a few decades.
Step 4: Protect Your Plan
What happens if life throws you a curveball? Protecting your retirement plan is just as important as building it. Here’s how:
Get Proper Insurance
Self-employed individuals should have health, disability, and life insurance, especially if they’re primary breadwinners. Disability insurance, in particular, can replace your income and keep you on track if you’re unable to work.
Stay Updated on Tax Benefits
Self-employed individuals often benefit from tax deductions for retirement contributions. An accountant or financial planner can help ensure you’re taking full advantage of what’s available.
Review and Adjust Annually
Once a year, sit down to review your retirement contributions, investment performance, and any major financial changes. Adjust, refine, and repeat.
Think of your retirement strategy as a living document that evolves as your business and personal life do.
Step 5: Stay Motivated and Consistent
Sometimes the hardest part about saving for retirement is sticking with it. Life gets busy, income fluctuates, and there’s always something else to spend your money on. Here are a few mindset shifts to keep you on track:
- Visualize Your Future Life: Imagine where and how you’ll live in retirement. This mental picture can help you stay focused on why you’re saving.
- Celebrate Small Wins: Contributed $100 more this quarter? Celebrate it. Progress is progress, no matter how small.
- Automate Contributions: Set up automatic transfers to your retirement account so saving becomes a seamless habit.
Quick FAQs
Q1. Can I contribute to multiple retirement accounts?
Absolutely. For instance, you could max out an IRA and also contribute to a Solo 401(k) or SEP IRA. Just keep in mind the overall IRS contribution limits.
Q2. What if I can’t afford to save much right now?
Start small—even $10–$50 a month adds up over time. The point is to build the habit, then increase contributions as income allows.
Q3. Should I consult a financial advisor?
If retirement planning feels overwhelming, working with a fiduciary financial advisor who specializes in self-employed clients can be a game-changer.
Q4. How do I avoid draining my retirement savings before retirement?
Establish a clear plan for emergencies and major expenses, and if possible, keep your retirement funds separate and untouched.
Final Thoughts
Your retirement is like a long-term project with your future self as the client. The work you put in now sets the stage for decades of financial freedom, exploration, and peace of mind. But the beauty of being self-employed means your plan doesn’t have to look like everyone else’s. Whether you start with a SEP IRA or take the plunge into a Solo 401(k), the most important step is to begin.
Retirement planning is about empowerment. It’s not just about the numbers; it’s about designing a life where you feel secure, no matter what chapter you’re in. With consistency, a bit of automation, and guidance when needed, you’ve got this.
