Planning For Retirement When You're Self-Employed

Posted on: 20 April 2017


Planning for retirement can be a daunting task when you're self-employed, but it doesn't have to be. Knowing how to manage your income and set aside for savings will help push you closer to your financial goals.

Making Room To Set Aside

If you're self-employed, your income may fluctuate. This can make it really hard to set aside for retirement. The good news is, you can beat the feast or famine mindset by giving yourself a paycheck. To figure out how to give yourself a paycheck you'll have to know how much your monthly expenses are first. To start, sit down and make a budget. Next, figure out how much you make annually and divide that across twelve months. Make sure the cost of your monthly expenses matches, or is less than, your monthly income amount.  

When you're going through a high-income phase start setting aside money until you have enough set aside to cover at least one month's worth of expenses. Then pay yourself from that account. When money comes in again, replenish that account. Planning to give yourself a paycheck really helps to smooth out your finances and make saving easier.

Choosing A Retirement Plan

When it comes to choosing a retirement plan, many people feel confused about where to start. An individual retirement account, or IRA, is the easiest place for most people to start. These accounts have a $5,500 annual contribution limit, and there is a $1000 annual catch-up contribution for people age 50 or over. If you're self-employed these contributions may not be tax deferred. IRAs are a great way to start saving for retirement, but for the self-employed person, it may not be enough for a comfortable retirement.

In addition to an IRA, you will most likely have to choose an additional retirement account. A solo 401k is designed specifically for self-employed individuals and has a higher contribution limit. You can deposit up to $18,000 annually in a solo 401k, and contribute an additional $6000 if you're over 50. These contributions are also on a take deferred basis which can save you money in the long run. The higher contribution limits and being able to deposit tax-deferred contributions make a solo 401k a natural choice to pair with an IRA.

If you find planning for retirement confusing, you aren't alone. Talk to your financial advisor to help determine what retirement plan is right for you. A financial advisor can help address concerns unique to your situation and get you started on the right path toward retirement. For more information, contact companies like Estate & Financial Strategies, Inc.