Being your own boss comes with a lot of freedom, but it also means taking full responsibility for your financial future, including retirement. But you might put off retirement planning without an employer-sponsored 401(k) or a human resources department reminding you to contribute. Thankfully, self-employed professionals have more control and flexibility when it comes to building a retirement plan that fits their lifestyle and goals. Here are tips you can consider when planning retirement:
Set a Clear Goal
Retirement looks different for everyone. You might want to travel, downsize, or keep working part-time on your terms. Determine what you want your retirement to look like and estimate how much money you will need to support that vision.
Work backward once you have a general idea. Break it down into how much you will need to save each year or month to stay on track. This number may change over time, but starting with a target makes everything else easier to plan.
Know Your Retirement Account Options
Self-employed individuals have several excellent retirement savings options. You can mix and match options depending on your income and needs. Below are your options:
- Solo 401(k). This is ideal for people with no employees. You can contribute both as an employee and employer, which allows for high contribution limits up to $69,000 in 2024 if you are over 50.
- SEP IRA. This is easy to set up and perfect for freelancers or sole proprietors. Contributions are made by the business and are tax-deductible, but you cannot contribute as an employee. It’s especially useful for those with high but variable incomes.
- SIMPLE IRA: This is Ideal for small business owners with a few employees. It’s not as flexible as a Solo 401(k), but it’s straightforward and low-maintenance.
- Traditional and Roth IRAs: These personal retirement accounts can supplement your main plan. A Roth IRA offers tax-free growth and withdrawals, while a traditional IRA gives you a tax break now.
Make Saving Automatic
It is tempting to skip saving during slower periods when your income changes from month to month. But you can stay consistent by setting up automatic transfers from your business or personal account into your retirement plan. Making contributions regularly helps build the habit regardless of the amount. Make larger contributions to catch up when income is high,
Think About Taxes
Self-employed retirement plans allow you to take advantage of tax savings. Contributions to most retirement accounts are tax-deductible, which can reduce your taxable income and lower your annual tax bill.
You won’t get a deduction if you are contributing to a Roth account. However, your money grows tax-free. Also, you won’t owe taxes when you withdraw it later. This can be a good decision if you expect to be in a higher tax bracket in retirement. Also, make sure you work with a tax professional who understands self-employment and can help you maximize deductions. Also, this professional should help plan quarterly payments and stay on top of IRS rules.
Build an Emergency Fund First
Make sure you have an emergency fund in place before you go all-in on retirement savings. Save at least three to six months of expenses in a separate, easy-to-access account. Having this cushion can prevent you from dipping into your retirement savings if business slows down or an unexpected expense pops up.
Invest for Growth
Saving is just part of the equation. You also need your money to grow. This means putting it into investments that have the potential for higher returns over time.
Most retirement accounts let you choose from a variety of investment options. Consider a target-date fund that automatically adjusts your investments as you get closer to retirement if you are not sure where to start. You can also talk to a financial advisor who can help you build a portfolio that matches your risk tolerance and timeline.
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