How to Save for Retirement When You Are Self-Employed

Blog | August 24th, 2023

The perks of being self-employed include being your boss and following your passions. You hustle to make ends meet, but it’s a satisfying path. However, you don’t get some of the positive aspects of a traditional job. You don’t have an employer to provide benefits, and it might seem harder to pinch pennies and create a nest egg for your retirement.

These strategies will help you save for retirement when you’re self-employed, ensuring you can take a disciplined approach to building a safety net for your future.

Set Clear Goals

Before you start saving for retirement, you should set goals for your ideal retirement age and the lifestyle you want to maintain. If you know you want to sell your house and live in an RV, you’ll have a certain goal in mind. However, you might want to tighten your purse strings even more if you want a cushy life.

Follow a Budget

You should start following a budget regarding your daily life and intended future. Track your spending for three months, documenting every dollar you spend. Then see how to cut out unnecessary purchases and put that money toward retirement instead. It’s worth making sacrifices now to have a great life in retirement.

Open an IRA

There are many types of Individual Retirement Accounts (IRAs). The two main types are Traditional and Roth. Both investment accounts grow over time. You can choose an investment approach based on your years before retirement.

Traditional IRAs offer tax-deductible contributions, so they don’t count as taxable income the year you invest the money. Your fund grows over time, though you’ll pay taxes on the money you withdraw in retirement. You can typically contribute $6,000 annually to a Traditional IRA.

Once you turn 72, you’ll take at least the Required Minimum Distribution (RMD) from your account. Withdrawing funds before you’re 59 ½ results in a 10% penalty in addition to the tax taken from the withdrawal. 

You pay tax on money before investing in a Roth IRA, meaning your withdrawals in retirement are tax-free, but you’ll pay tax on that income for the year you earned it. Like Traditional IRAs, Roth IRAs have an annual contribution limit of $6,000. IRA contribution limits can change over time, so always check your options before investing.

Roth IRAs are more flexible regarding early withdrawals, though you’ll still face a minor penalty if you withdraw before you turn 59 ½. Once you’re over that age, you can take out money without penalties, even if you haven’t reached retirement age.

Invest as much as you can in each IRA annually. This approach accelerates your retirement funds because you’ll earn interest on the money. If you’re over 50 and preparing for retirement, you can invest more money as “catch-up contributions” to help you meet your goals.

Invest in an Individual 401(k) or SEP

You can invest more money in your future by opening an individual 401(k) or Simplified Employee Pension (SEP).

An individual 401(k) is similar to what you could have through a traditional employer. You can make annual salary deferrals and contribute up to 25% more of your net earnings for a total investment of $66,000 in 2023—and the IRS continually raises this limit.

A SEP allows you to contribute 25% of your net earnings to retirement. This option is easy to establish and allows flexible contributions, so you’re not committed to a specific amount if you encounter cash flow problems.

Automate Savings

It’s easy to tell yourself that you’ll invest a set amount each month, but if you configure your bank account to allocate a specific investment to your retirement savings each month, you’ll know you’ve put that money away and won’t forget. This consistency removes the temptation to spend that money on other things.

Diversify Investments

While IRAs, 401(k)s, and SEPs are great options for building a retirement fund, you should diversify your investments into many options. Look into stocks, bonds, and real estate to ensure you have a nest egg when you retire. Consider your retirement timeline before choosing a slow build or risky investment.

Review Your Progress

You might think you can put money away and not think about it until you need it, but you should check your progress regularly. If you start saving in your 30s and have years to retire, you don’t need to worry too much about how your IRA fluctuates with the market. However, you want to ensure your money is growing so you’ll have a safety net.

Final Thoughts on Saving for Retirement When You Are Self-Employed

Saving for retirement as a self-employed person takes a lot of discipline, but having a strategy in mind empowers you to improve your future. Start as early as you can and stay consistent with your investments so you’ll reach your goal and enjoy your golden years.

Related: Boosting Mental Wellbeing: How Financial Stability Impacts Overall Happiness