10 Retirement Planning Tips for the Self-Employed

Catherine Collinson, CEO and president of nonprofit Transamerica Institute and Transamerica Center for Retirement Studies, recently offered PLANADVISER a sneak peek at a new survey report focused on the self-employed, aptly titled “Self-Employed: Defying and Redefining Retirement.”

According to Collinson, the survey data shows clearly that self-employed people think differently about retirement compared to their peers working at companies and corporations.

“While they have areas where improvements are needed, the self-employed offer a very inspiring vision of working life and retirement,” Collinson says. “The survey data shows they enjoy what they do and they are enjoying life as a result. For this reason, dreaming about retirement is not all that relevant to them. They already have the flexibility to take time off when they want or need to, and they can define their schedules for themselves.”

One finding Collinson says is particularly intriguing is that the self-employed engage in more health-related activities such as eating right, exercising and getting plenty of rest.

“We often find in surveys of fulltime workers that these are some of the things they feel they are missing out on, therefore the survey results really paint a picture of how the self-employed are a distinct group,” Collinson explains. “Their vision of retirement is to continue to work beyond age 65, or even planning not to retire at all.”

Indeed, according to the survey, only 11% of the self-employed plan to immediately and fully stop working when they reach the traditional retirement age. They see themselves instead as entering a period of transition and remaining in the workforce as long as they want.

“This is very different from the perspective of employed workers, who have seen that retirement can happen unexpectedly due to being laid off or for health reasons that make it impossible to keep one’s normal work schedule,” Collinson says.

While they excel in various ways, there are also areas where the community of the self-employed can do better in terms of planning for the long-term financial future. Like employed workers, they seem to  overlook some of the most basic steps to creating genuine retirement readiness, for example calculating anticipated retirement expenses, reviewing their retirement income sources and studying Social Security claiming strategies.

“Another area where support is clearly needed among the self-employed is in looking at their ability to successfully capitalize on their equity,” Collinson says. “This process is seldom easy or straightforward.”

Other survey findings show only 38% of the self-employed who are currently saving for retirement use a financial adviser to assist with their saving and investment strategies.

“For advisers, there is so much untapped potential,” Collinson says. “It’s concerning to me as a retirement researcher that it appears the self-employed aren’t taking full advantage of tax-advantaged retirement savings accounts, either due to a lack of knowledge or awareness. This is something advisers can really help with.”

The survey suggests only about a third of the self-employed are using a traditional or Roth IRA. There is also very low take up of other account types meant for sole proprietors or small businesses, such as Simplified Employee Pension Individual Retirement Arrangements (SEPs), Savings Incentive Match Plans for Employees (SIMPLE IRAs), or individual 401(k)s. The response rate for any of these accounts did not go above 10%.

“It’s a surprisingly low take up, given that these are powerful vehicles for people in this situation to actually generate tax-advantaged dollars for their retirement,” Collinson says. “Interesting too is the wider conversation around the SECURE Act and open multiple employer plans (MEPs). A lot of savings options are already available for small employers and the self-employed, but they are not being taken advantage of. So it goes to show that things like open MEPs will need strong advocacy to make a difference for the self-employed and the small business community. Advisers will have to drive the adoption of these plans among this group.”

Collinson observes that only 46% of the age-50 plus self-employed community are aware of catch-up contributions, which is lower than the figure for those employed by corporations and companies. On the other hand, the emergency savings in this self-employed group are pretty strong. At the median they have about $10,000 saved for emergencies, compared with about $5,000 at the median for the employed workers surveyed. It’s one area where the self-employed are excelling and it means they have the opportunity to start looking forward and think longer-term about their finances.

“It’s also striking to see this group is far less likely to cite paying off debt, specifically credit card debt, as a financial priority,” Collinson says. “This is another indicator that they are successfully living within their means and are well positioned to start thinking more about retirement planning.”

As Collinson notes, the survey report makes 10 practical recommendations that advisers can share with the self-employed, as follows:

1. Create a budget that includes income, living expenses, paying off debt, and financial goals such as building short-term savings and long-term retirement savings.
2. Start saving early and get into the habit of saving consistently over time. If confronted with an irregular paycheck, save more during boom years and less during lean years.
3. Learn about tax-advantaged retirement savings opportunities for the self-employed, including Traditional and Roth IRAs, SEP IRAs, SIMPLE IRAs, and individual 401(k)s. If age 50 or older, learn about catch-up contributions to 401(k)s, 403(b)s, and IRAs.
4. Automate savings. One of the proven advantages of employer-sponsored retirement benefits is the convenience of payroll deduction. Even without access to such benefits, it may be possible to automate savings by setting up an automatic funds transfer, for example, from a checking account to a savings or retirement account.
5. Protect yourself from financial shocks that could disrupt your current situation and future retirement by building emergency savings and considering insurance coverage (e.g., major medical, disability, life insurance, liability).
6. Utilize government-sponsored retirement programs designed to help the self-employed save for retirement, such as making contributions to Social Security. Equally important is keeping up to date on paying your taxes, e.g., quarterly payments to the IRS and state government.
7. Develop a written retirement strategy that includes a budget, estimates retirement savings, income needs and addresses a broad range of other factors (e.g., government benefits, investment returns, healthcare expenses, long-term care needs, and paying off any debt). It should also include an exit strategy for one’s business and contingency plans if forced into retirement sooner than planned.
8. Consider seeking help from a professional financial adviser in planning for retirement, developing an exit strategy for your business (if applicable), and a plan for converting retirement assets into retirement income. Retirement planning can be especially complicated for the self-employed. The self-employed are more likely than employed workers to have a wide variety of expected sources of retirement income. Some of these, such as investment property or the sale of a business, may be more difficult to convert into retirement income than more liquid assets, such as savings and investments held at a financial services firm or retirement plan provider. A financial adviser can also assist with and/or help coordinate tax and estate planning with your accountant and attorney.
9. Take proactive steps to help ensure the ability to continue working and retire on your own terms. Keep your job skills up to date. Invest in training and skills development for yourself and those you employ. Meet new people and grow your network.
10. Take good care of yourself and safeguard your health. Consider the long-term health implications when making lifestyle decisions today. Find appropriate healthcare coverage for you, your family, and your employees, if applicable.