Retirement Planning for Entrepreneurs: 4 Considerations for Self-Employed Individuals

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While retirement planning usually isn’t simple, it can be especially complex when you’re self-employed. Not only might you face issues such as planning for regular retirement savings contributions with an irregular income, but you usually won’t have the convenience of an employer-sponsored plan for contributions.

Here are four retirement planning considerations for entrepreneurs.

1. Explore Self-Employed Retirement Account Options

You should consider the various retirement plans available to self-employed individuals so you can decide which best fits your situation. Check with the IRS for its specific rules, contribution limits and tax consequences.

If you don’t have employees, you might consider a solo 401(k) plan, which would let you both defer some of your earned income and make an employer contribution. Another option is a Roth individual retirement account for post-tax contributions or a traditional IRA for pre-tax contributions. A benefit of IRAs is they’re not tied to your employment, though they have lower annual contribution limits than a 401(k).

With employees, you could use a traditional or Roth 401(k) for salary deferrals and net self-employment earnings contributions. A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a pre-tax option if you don’t have more than 100 employees, though there are mandatory employer contributions. A Simplified Employee Pension (SEP) IRA is another option for contributing pre-tax income, though it doesn’t allow catch-up contributions.

2. Consider Your Retirement Contribution Strategy

Self-employment usually comes with irregular income, which can make it challenging to come up with funds for your retirement savings after paying your expenses. With your retirement account’s contribution limits in mind, plan on setting up automatic monthly contributions to ensure you’ll be making progress. 

While you’ll want to calculate your retirement savings needs and consider your budget, aim to save 10% to 15% from your self-employment earnings and other income sources to stay on track.

3. Look at the Tax Consequences

Don’t forget the tax consequences both while you save and when you withdraw from your retirement account.

If you contribute pre-tax money, you’ll owe taxes on the distributions later, so think about your expected tax bracket during retirement and any income you’ll still make from self-employment and other sources. Although paying more taxes now can seem unappealing, contributing post-tax dollars might make sense for less of a tax burden during retirement.

4. Plan for the Risks

As an entrepreneur who is likely familiar with handling risk, you shouldn’t ignore the uncertainties that come with retirement planning.

Besides considering how irregular income could affect reaching your savings goal, pick diversified investments to balance out some risk. You might prefer mutual funds or exchange-traded funds over researching and deciding on multiple individual stocks.

You’ll also want to consider how your future withdrawal rate and inflation could affect how long your savings last. Plus, explore health savings accounts if you have a high-deductible health plan that’s eligible for one. Any unused funds in the account could help you better manage higher healthcare costs during retirement.

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