6 Retirement Questions You Have To Answer When You Don’t Have an Employer
Retirement planning looks a little different when you don’t have a traditional employer. There’s no automatic 401(k) enrollment and no company match to help you build savings.
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But this doesn’t mean you can’t retire comfortably. It just means you need to be more proactive in your retirement planning.
If you don’t have an employer, here are some questions that may come up.
1. Can I Retire?
Before you can answer this question, you need to know what income will replace your paycheck once you take a step back from work.
“As a self-employed individual... you'll rely largely on selling off your business, asset sales or other capital gains (real estate, investments, etc.) as a source of retirement income rather than payroll distributions," said Cody Schuiteboer, president and CEO of Best Interest Financial.
When working with his clients, Schuiteboer first calculates the annual income needed in retirement and subtracts any guaranteed sources of income, such as Social Security benefits, rents from real estate you own, annuities or lump-sums paid for business buyouts. The result is the gap that your investments should cover.
“Multiply this gap by 25 for 4% conservative withdrawals or by 30 for more conservative projections,” he explained. “For example, a couple spending $90,000 per year with $35,000 per year in Social Security would require somewhere around $1.4-$1.65 million in investments.”
2. Do I Want To Retire?
“It may surprise you, but the vast majority of self-employed people don't have to retire at a certain age or face a pension cliff; there's simply no mandatory retirement age,” Shuiteboer said.
According to him, the question is whether you want to exit completely, reduce hours and clients slowly, or pivot by changing services or contracts without reducing overall workload.
“Each scenario is radically different in terms of how much you'll need in retirement, which means you're either saving too little for the future you envision or way too much,” he pointed out. “And the reality is that most self-employed people I talk to haven't really thought this part through yet.”
3. Where Can I Invest?
If you don’t have access to a traditional workplace retirement plan, you still have options.
“Depending on their income, business structure and eligibility, many investors consider accounts such as IRAs, SEP IRAs or Self-Directed Solo 401(k)s,” explained Brian Finkelstein, chairman and financial expert at Broad Financial.
For example, business owners with no full-time W-2 employees have access to a Self-Directed Solo 401(k). This type of retirement plan provides tax-advantaged growth and more control over retirement investing, according to Finkelstein.
“A Self-Directed Solo 401(k) also allows investors to diversify their retirement funds into alternative assets such as real estate, private lending, private business and more,” he added.
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4. How Can I Contribute to Retirement Consistently?
For those who are self-employed, not having a steady paycheck means your income can fluctuate.
“Set up a savings account specifically named ‘Retirement Fund’ and treat it as a percentage of every check you receive from your clients,” Schuiteboer recommended. “Once it's set up, deposit 15-20% of each check received into that account, and then every quarter, transfer the balance of this account into your chosen retirement account.”
Finkelstein also suggested taking advantage of higher-income months. “Many investors consider contributing more during higher-income months and scaling back appropriately during slower periods,” he said.
5. How Do I Cover Health Insurance Costs Before Medicare Eligibility?
If you retire before age 65, the standard age for Medicare eligibility, you may need to cover the gap. Schuiteboer recommended setting aside separate savings for health care costs and maxing out a Health Savings Account (HSA) if you qualify. HSAs offer tax advantages, and after age 65, the funds can be used for non-medical expenses and taxed as ordinary income.
“Plus, you may want to try to minimize taxable retirement income in the pre-Medicare period to make sure you're eligible for Affordable Care Act (ACA) subsidies,” he added.
6. What Kind of Social Security Benefit Will I Have and What Will It Cover?
One thing Schuiteboer doesn’t recommend if you’re self-employed is reducing your income to pay less income tax.
“When calculating Social Security benefits, the government considers the 35 highest-earning years of your life. If your income was intentionally low due to minimizing reported wages in order to reduce your taxable income, your benefit will reflect that,” he explained. “For most self-employed people I've been working with, Social Security replaces 15-30% of pre-retirement income rather than 40%.”
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This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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