One of the biggest challenges of being self-employed is saving money for retirement. Unlike employees at most companies, self-employed workers don’t have the option of contributing to company-sponsored retirement plans such as 401(k)s. Instead, you need to open your own retirement accounts and discipline yourself to contribute to them regularly.
Yet one in five self employed workers are not saving for retirement at all, according to a new survey from the nonprofit Transamerica Center for Retirement Studies in collaboration with Transamerica Institute.
The survey, released on June 28, found that 68% of self-employed workers are saving for retirement and started doing so at a median age of 29. However, many are not saving consistently. About one-third (34%) said they only save for retirement from time to time, and 20% said say they never save for retirement.
Among those who are currently saving, 79% are doing so in one or more types of tax-advantaged retirement accounts, with a traditional or Roth IRA being the most common (44%). Relatively few are saving in tax-advantaged accounts designed for sole proprietors and small businesses, such as Solo 401(k)s, SIMPLE IRAs and SEP IRAs.
The COVID-19 pandemic put many self-employed workers behind on their retirement savings plans. More than one-third of the self-employed (34%) said their financial situation worsened during the pandemic, with a similar percentage saying they were unemployed at some point during COVID. Nearly one-fifth (17%) now expect to retire later due to the pandemic. Of those, 63% expect to retire after age 65 or don’t plan to retire at all.
Only 26% of self-employed workers have a financial strategy for retirement in the form of a written plan, according to the survey. Less than half (43%) have a backup plan for income if forced into retirement sooner than expected. Just three in 10 use a professional financial advisor. The median estimated retirement savings of self-employed workers is only $42,000 — even though more than half (57%) are either Gen Xers or baby boomers.
Despite the challenges of saving for retirement when you are self-employed, it’s something you should start doing immediately, said Catherine Collinson, CEO and president of Transamerica Institute and TCRS.
“Retirement planning is especially important for the self-employed,” Collinson said in a press release. “While working beyond traditional retirement age can bring income and opportunities to save, planning not to retire is not a retirement strategy.”
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