Retirement Guide for the Self-Employed

The number of self-employed people is on the rise as the appeal of having freedom and control over one's own future is increasing.

Retirement Guide for the Self-Employed

Entrepreneurship is becoming more popular. Many people find it appealing to be self-employed, because they can control their own future and have unlimited income. Retirement planning is one of the challenges.

This guide will help you prepare for retirement if you are a self-employed person.

How does retirement planning for self-employed people differ?

Those who are employed by a company, or work in the public sector, have access to 401Ks and pension plans that are matched by the company. Saving for retirement is automatic for them. Self-employed individuals, on the contrary, must be proactive in creating their own retirement plan. Also, they must be disciplined to save a portion of their income.

Early planning and savings are essential. They should be based upon your specific retirement goals such as your ideal age of retirement and your retirement lifestyle objectives.

Understanding Retirement Plans for Self-Employed Individuals

Self-employed individuals have a variety of options for retirement accounts.

Traditional or Roth IRAs

Individual retirement accounts are the simplest way to save for retirement. Traditional IRAs can be funded with pretax income, and they grow tax deferred until retirement. In most cases, contributions to an IRA can be deducted from your taxes, but only up to a certain limit. For tax year 2023, this is $6,500 per person under 50, and $7,500 per person over 50. You'll have to check if you qualify for any exceptions.

IRA contributions are not taxable until the age of 59 1/2. Withdrawals made after this age are taxable. Before age 59 1/2, distributions are subject to income taxes plus a 10% tax penalty.

IRA contributions may be invested in a variety of investment vehicles including mutual funds, stocks, bonds and collectibles. Collectibles and insurance policies are exceptions.

Roth IRAs have similar rules but contributions aren't tax deductible. The earnings from the IRA, however, are not taxed and any distributions made after the age of 59 1/2 will also be tax-free.

Solo 401K

You can contribute as both an employee and an employer to a Solo 401K if you are self-employed with no employees. Contributions to solo 401Ks are tax deductible, grow tax deferred until retirement and withdrawals are then taxed. Employers can contribute up to $66,000 of their total income, which is $22,500. Employees can contribute up to $22,500.


An employer or a person who is self-employed can establish a simplified employee pension (SEP IRA). You can contribute to a SEP IRA even if you do not have employees. The contribution limits for SEP IRAs are higher than traditional IRAs. You can also make tax-deductible contributions to SEP IRAs on behalf of your employees.

You can make changes to the amount of contributions made by employees at any time as long as you contribute equally to all employees.

The lesser of 25% or $66,000.


Both employee and employer contributions are allowed for the Savings Incentive Match Plan For Employees (SIMPLE IRA). You can contribute as both an employer and employee if you are the owner of a business. Employee contribution limits are $15,500 while employer contribution limits are 2% of net earnings.

Succession planning

A succession plan is an outline of what will happen when you retire, pass away, or become incapacitated. This should be included in your retirement plan. You may decide to retire and sell your business or hand it over to a family or key employee. It is important to document how and when the transition will take place, along with a plan for the new person to step into their role.

It is important to include a succession plan in your retirement plan because it can provide you with residual income as the founder of the business.

There are several steps to creating a succession planning.

Timeline Planning

You'll first need to decide when you will transfer your business to the successor. You'll probably have a retirement target age. So you will need to decide your retirement date. You should also have a plan in case you become disabled or die before the date you set. Or, if your retirement is premature, you will need to determine what happens to the company.

Select Your Successor

It can be difficult to choose your successor, especially if there are multiple family members who have an interest in taking over the company. Your decision should, however, be practical. Choose a qualified person to run the business to give it a better chance to survive after your retirement. You will also be able to protect any residual income you intend to receive from your business.

You can transfer ownership to several family members or key staff, but first you will need to decide how ownership will be split. Determine the main roles that each person will play. You may find that one person is better suited to manage the finances, while another has more experience in operations.

Create an organizational structure that makes these roles clear.

Document your processes

You'll need to show your successors how you managed the business to make it successful. So, you will have to create a business plan. Document your business's operational processes, key personnel, marketing strategy, financial processes and human resource processes.

Your keys to success will also be important to mention. What have you done to grow your business?

Plan your transition

To create a transition plan, you must first evaluate the skills and experiences of your successors to determine if any training is required. This training can be done during a period of transition, when you are still in the business and working with your successors.

This transition period will require you to set terms in terms of compensation and responsibilities. This plan for transition should be defined clearly in writing. This transition period should also be defined in writing.

Plan your steps for this time period. You might want to involve all of your successors at once, or you might want to do it one-by-one so you can devote more time to them.

You need to be able to explain how you will prepare them to take over the business.

How to Create a Transfer of Ownership Agreement

With the assistance of an attorney, you'll create a formal transfer agreement. The agreement must specify the financial terms, such as the residual income and timeline for the transfer.

The document will also have to include any formal procedures, such as transferring ownership of a business entity, like an LLC, or how contracts, leases and other agreements, like business insurance and business contracts, will be transferred.

You can work with your attorney to determine the exact terms and provisions of the contract.

Calculate Your Retirement Needs

Your retirement plan should be based upon your retirement goals. Your retirement plan will depend on your goals, and the amount you need to save to achieve them. When calculating your required savings plan, you'll need to make investment growth projections as well as factor in inflation and life expectancy.

You will need to factor in the sale of your business or transfer to successors if you intend to retire.

Calculating your saving needs is a complex process and best done by a financial adviser.

How to boost your retirement savings

You must first be disciplined in saving and maximising your contributions. You should also be disciplined with your spending, and live within your budget to maximize your savings.

You should diversify and balance your retirement account investments based on the stage of your life and your risk tolerance. Your financial advisor will be your best resource to help you build a portfolio to meet your goals.

You are not restricted to just retirement savings accounts. Other investment accounts can help you grow over time. Investing in real estate or other vehicles is another option. Over time, building a portfolio with rental properties can provide you with supplemental income after retirement.

Increase Retirement Income

If you are planning to retire, you should consider ways to increase your income.

As an entrepreneur you might not feel comfortable without a productive job. This is why so many retirees who are self-employed today start a small business to supplement their income. According to a study, 40% of baby-boomers have started a small business.

Start a business consulting to use your business experience. Your credentials could help you find local small businesses that need your management consulting services. If you are good at operations, then focus on operations consulting.

You can earn a good income by consulting on your own schedule.

Freelancing is another idea. You can use a skill you have acquired to earn money. You may have become an expert in digital marketing while you were an entrepreneur. As a result, you could offer digital marketing services to clients as a side business. You could also combine your writing skills with business experience and become a freelance writer.

You can create online courses to earn passive income. You can upload your course curriculum to many websites, then charge students to access it. You don't need to do anything but answer questions from students once you have developed your curriculum.

If you have acquired a bookkeeping skill, another idea would be to start a small part-time business. Even if you work a few hours a week, you can earn a few hundred bucks.

You could invest in distressed properties and rehab them to resell. It's a good option, particularly if you are handy. You could either do this periodically, when you need a quick project or on a more regular basis. If you flip houses correctly, it can be a profitable endeavor.

Rely on professionals

Self-employment or not, planning for retirement is not something you can do on your own. It is important to hire a financial planner to create a comprehensive retirement and financial plan as well as a plan for your short-term financial goals. Look for a financial advisor who has experience with succession planning to help you.

A lawyer is necessary when drafting your succession plan.

The conclusion of the article is:

This article will help you realize that now is the best time to begin planning for retirement. You may think that retirement is far away, but a plan for the long term will help you achieve your goals. It is also important to learn to save disciplined and to follow your financial planner's advice. You can live your retirement exactly as you wish if you follow the right steps.