5 Tips for Planning for Retirement When You Are Self-Employed

5 Tips for Planning for Retirement When You Are Self-Employed

Self-employment comes with a lot of financial flexibility and opportunity for growth. However, it can pose challenges when it comes to saving for retirement. More so because it all depends on your choice for planning retirement, which is often an overwhelming endeavor in the self-employment sector.

Fortunately, you don't need a company-funded 401 (k) to plan and secure your retirement since there are many retirement options you can leverage as an entrepreneur. Here are five ways to plan for retirement as a self-employed worker:

Start Saving Today

According to research, 34 percent of self-employed workers don't have a retirement saving plan, while 37 percent claim they do not make enough money to save for retirement. The truth is, there is no amount so small to save; you only need to earmark a few thousand dollars every year to boost your savings over time.

If you are just beginning to save for retirement, make sure you save as much as you can to leverage the power of compound interest. You might have to make a few sacrifices in several areas, but it will be worth it in the end.

Open a Tax-Advantaged Account

A tax-advantaged account is a great way to start planning for retirement. Here are alternatives to 401 (k) that are recommended for self-employed individuals:

SEP-IRA — This option allows you to save up to 25 percent of your total earnings. However, you can save a smaller percentage of your compensation if you experienced a slow year. It is favorable for people with few or no employees.

One-participant 401 (k) — This option is similar to the conventional 401 (k), the only difference being that it is only available for self-employed people with no employees. The plan also allows you to save up to another 25 percent of your annual compensation.

Traditional IRA or Roth IRA — The difference between traditional IRA and Roth IRA is that in the former, contributions are made pre-tax, while in the latter, they are made after-tax. The Roth IRA is a good option when you start saving at the beginning of your career.

Diversify Your Portfolio When Planning for Retirement

Investing in a range of assets (bonds, stocks, and cash) can help boost your financial growth for a greater reward in the long run. If you are further from the retirement age and therefore in a position to accommodate losses, you can invest in stocks. If closer to your retirement age, you can opt for stable bonds and lower-risk investments.

The idea here is to spread your investments across multiple assets to safeguard against market volatility. Diversifying your portfolio and making viable investments can ensure you have enough savings when you retire.

Automate Savings

Automating your retirement savings allows you to grow your savings account without worrying about whether you are saving enough or on time. Here, you can set an automatic funds transfer from your checking account to your retirement account. With an automatic funds transfer, you can be guaranteed substantial savings by the time you decide to retire.

Minimize Spending and Save Extra Cash

Examine your budget to see where you can possibly save a few dollars when planning for retirement. You may negotiate your car insurance or carry your lunch to work; whatever you can forego without much inconvenience, cut it or minimize the amount you spend on it. This allows you to direct more money to your retirement savings account, or even better, invest it to expand your business to facilitate your retirement saving.

Set Goals When Planning for Retirement

Setting benchmarks along the way allows you to gauge your progress as you pursue your retirement goals. You are also able to determine the areas you are falling short and consequently make adjustments to increase your retirement savings. Understanding why you are saving can motivate you to play your part to achieve your ultimate goals.

Start Planning for Retirement When Self-Employed

As a self-employed person, planning for retirement early on can save you from financial distress in your latter years. These tips are sure to get you started as you create a retirement plan that works for you.


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