Being self-employed comes with so many advantages that you could enjoy, you have the absolute flexibility and freedom of being your own boss, no one orders you around and you practically behave the way you want to.
But there are disadvantages too, one of such disadvantages is the fact you don’t have the traditional benefits enjoyed by many employees, for example the company sponsored retirement plans.
The implications obviously are that you’re entirely responsible for your own retirement responsibilities, although it might seem too much for some people to handle, there is actually some positivity to take out of it, the good news is that there are so many retirement plans that are arranged for those who are self-employed. we’ll breakdown some of these strategies so that you can start applying them immediately
Why Is Retirement Planning Important?
You might be working and very strong for now, but what are the chances that as a Self employed you are going to keep working forever? As you age, there are certain things you can no longer do.
If it happens that you didn’t plan your requirements very well, you might be in for a very bumpy ride at old age, with retirement planning, you are very sure to have enough money to support yourself after you stop working.
Without having a retirement plan for yourself, you might be forced to rely just on Social Security, which you can testify may never be enough to cover all your potential expenses.
As a self-employed person, this planning is even more critical because:
- You don’t have employer contributions to a retirement plan.
- Your income is not definite, it differs from month to month.
- You might even have to face more tax responsibilities.
What are Your Retirement Goals?
Before you start saving, you need to first of all think about your what you want at retirement. Ask yourself:
- When do you want to retire?
- How much money will you need each month to live comfortably?
- What kind of lifestyle do you want in retirement (travel, hobbies, etc.)?
You can make use of a general rule of thumb that often targets about 70-80% of your pre-retirement income to maintain your current lifestyle. Once you know what you want your retirement to be like, you can actually start saving towards it.
Look for Retirement Savings Options for the Self-Employed
There are lots of retirement accounts that are made only for people who are self-employed. Below we’ve given an overview of some of them.
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SEP IRA (Simplified Employee Pension IRA)
A SEP IRA is actually one of the easiest retirement plans that any self-employed person can set up. With it, you can easily save a good amount of your income. also the Contributions are tax-deductible.
Contribution limit: you can get Up to 25% of your net earnings, or $66,000 for 2023 (whichever is less). this is a very popular option for retirement savings if you are self-employed
2. Solo 401(k)
A Solo 401(k) is similar to a traditional 401(k) but it is made specifically for people who are self-employed that has no employees. with it, you easily have a high Contribution limit, which means you can save aggressively.
- Contribution limit: Up to $22,500 in 2023 as the “employee” plus 25% of your net earnings as the “employer,” which means a combined total of $66,000. If you’re over 50, you can contribute an extra $7,500 as a catch-up contribution. It is for High-earning self-employed people that want to save as much as possible.
3. SIMPLE IRA (Savings Incentive Match Plan for Employees)
A SIMPLE IRA is another saving option that is very easy to manage as a self-employed person. It has a lower Contribution limit than a SEP IRA or Solo 401(k) but it’s still a very good option.
- Contribution limit: $15,500 in 2023, plus a 3% employer match or a flat 2% of earnings. It is good if you are a Self-employed and have a small number of employees.
4. Traditional or Roth IRA
Any Self-employed person can easily contribute to a traditional or Roth IRA. Although they have a very low contribution limit, however they’re still good for those who wishes to save with it
- Contribution limit: $6,500 in 2023, with an additional $1,000 catch-up contribution if you’re over 50.If you are just starting with retirement savings or looking for additional savings options, you can make use it.
Budget for Retirement Savings
When you are Self-employed, it could be really tricky for you to budget for retirement savings. the reason is simple, as a self-employed individual, your income might fluctuate, Chances are that you might not meet your target in some situations, while in other situations you might have more than your target, so it really fluctuate, however there are ways you can easily manage these situations
- Start small: If money is tight, start by saving a small percentage of your income, we know that things will get better and your income will increase, when that happens, you can easily increase your contribution as your earnings grow.
- Automate savings: You can set up an automatic transfers to your retirement account, this will help you to save very consistently, even when you might be very busy with other activities.
- Plan for irregular income: During the period you are experiencing high-earning months, you can decide to save a larger percentage, this will definitely help you to make up for the months when your income is lower. Just make sure you save consistently even if it’s small amount, as time goes on, your savings can grow
Final Thoughts
Saving for retirement as a self-employed person is not easy especially when you compare it with an employee, however it doesn’t mean you can’t save up for your retirement, in this blog post, we’ve clearly explained to you the best ways you can save for your retirement, we believe that if you follow our Strategies, you’ll be able to save up and have an awesome retirement.