Can self-employed people ever actually retire?

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I’ve been self-employed for more than 15 years, and I’ve never looked back.

I can’t put a dollar figure on the riches I gain from the freedom I have to work when and where I want, to choose my clients and select projects that permit me to focus on my mission, my “why,” as fans of the author Simon Sinek can relate.

But there are two features of working in-house that I genuinely miss — an employer’s 401(k) retirement plan that made it easy to save for retirement by automatic payroll deduction, and the fact that my employers tossed in funds to match a portion of my contributions. That was sweet. Saving became a habit. It was out of sight, out of mind.

When you work for yourself, paychecks are often erratic, and it can be a squeeze to set the money aside on a regular basis for retirement — even if it’s tax-deferred. There’s a fear that you may need those funds and the idea of having to pay a penalty to withdraw them is a turnoff. (Generally, early withdrawal from an individual retirement account (IRA) prior to age 59½ is subject to being included in gross income plus a 10% additional tax penalty.)

That said, there are a handful of ways self-employed folks like me (and you) can save for retirement in tax-favorable accounts without too much angst. More on this shortly.

First, the backdrop. The Transamerica Center for Retirement Research report on the self-employed and retirement found that only 55% of the self-employed indicate they consistently save for retirement, while 30% save from time to time, and, shockingly, 15% say they never save.

Of those who are saving for retirement, relatively few are saving in tax-advantaged retirement accounts. Only 31% are saving in a traditional or Roth IRA, according to the report. And only 40% expect retirement income from typical retirement accounts such as 401(k), 403(b), or IRA plans.

One positive note: among those currently saving for retirement, they’re socking away 15% (median) of their annual income.

The truth, and I confess I fall into this line of thinking from time-to-time, is aside from the anxiety of perhaps needing the money today, many self-employed workers don’t feel a real necessity to have gobs of money set aside for their future financial security. They’re counting on working well past the traditional retirement age, and figure they ultimately have fewer nonworking years to bankroll.

Almost seven in 10 self-employed (68%) expect to retire after age 65, or do not plan to retire, according to the survey. And interestingly, they’re more likely to cite healthy-aging (83%) than financial (72%) reasons for doing so.

As a consequence of the “stay-on-the-job” longer attitude, it would seem, only 29% of the self-employed prefer not to think about or concern themselves with retirement investing until they get closer to their retirement date, compared with 42% of employed workers.

And they’re good with that approach: 65% of the self-employed are confident that they will be able to fully retire with a comfortable lifestyle, including 24% who are “very” confident and 41% who are “somewhat” confident. While 63% of employed workers are confident, only 18% are “very” confident and 45% are “somewhat” confident.

“The self-employed have an inspiring vision of aging and retirement,” Catherine Collinson, CEO and president of the nonprofit Transamerica Institute and Transamerica Center for Retirement Studies, told me. “Compared with employed workers, the idea of retirement isn’t as relevant, because they have far greater freedom to continue working — or retire — on their own terms.”

While that’s all well and good, “it doesn’t let them off the hook for saving and planning,” she said. “In fact, it requires serious strategizing. When asked about their retirement strategy, only 18% of the self-employed have a written plan.”

Regardless of how promising you envision your work life’s longevity, if you’re among the four in five self-employed who haven’t done so already, I recommend crafting a detailed financial plan for retirement. While no one has a crystal ball, I’ve found running the numbers and looking ahead is motivating at any age.

If you aren’t comfortable doing it yourself, you might opt to hire a financial adviser to guide you Even though I have a grasp of personal finance, my husband (who is also self-employed) and I work with a financial planner who helps us to regularly do the practical and soul-searching work to estimate our savings and retirement income needs and to envision the life we’d like to lead in our later years.

I recommend one with the Certified Financial Planner (CFP) designation. A few searchable databases: the National Association of Personal Financial Advisors, The Garrett Planning Network, the Financial Planning Association and the Certified Financial Planner Board of Standards.

That process has become our safety net in case our world shifts. “You need to have a Plan B in case you’re forced into retirement sooner than expected,” Collinson said. “Only 31% of the self-employed in our report have a backup plan in the event they are unable to work before their planned retirement.”

4 retirement accounts for self-employed workers

I agree wholeheartedly with Collinson. Retirement savings is nonnegotiable. These retirement accounts are available at most mutual-fund companies and brokerage firms. You can set one up online and then contribute via an automatic funds transfer from your checking or saving account.

You can put as much as $6,000 in 2019 (plus an additional $1,000 if you’re 50 or older) into a traditional or Roth IRA. With a traditional IRA, your contributions are tax-deductible, and the growth is tax-deferred. But if you have a spouse covered by a plan, income limits may apply; for more details, check the IRS website.

With a Roth IRA, your contributions are not tax-deductible, but your money grows tax-free, and you’ll pay no taxes on your distributions as long as you follow the withdrawal rules. (Generally, you must have held the account for five years and be 59½ or older.) Income limits for Roth IRAs: If you are married filing jointly, you must have modified adjusted gross incomes below $193,000 this year to make a full contribution. Single taxpayers must have a modified gross income below $122,000 to qualify.

A simplified employee pension or SEP IRA is a tax-deductible retirement plan, if you’re a single employee. For 2019 tax returns, you can contribute up to 25 percent of your compensation or $56,000.

A one-participant or solo 401(k) is a retirement plan for self-employed people without employees (a spouse is an exception). This year, you can set aside, pretax, up to 25 percent of your pay, but your total contribution can’t exceed $56,000.

Of course, there’s nothing wrong with aiming to work past your 60s and into your 70s. I certainly do. That makes it possible to add to retirement accounts and to sidestep tapping into them for living expenses. That’s the safety net.

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