By Daniel Korleski, MBA
As a self-employed professional, you know that your career has looked a bit different compared to your counterparts who are not self-employed. While you have enjoyed the freedom and benefits that come with being your own boss, being self-employed comes with its own challenges, particularly surrounding retirement.
For any self-employed individual, saving enough for retirement is crucial for their future. Unfortunately, with the unending tasks of actually running your business, putting in place a proper retirement plan can fall to the wayside.
The good news is that you are not alone in this struggle. More than 16 million Americans were self-employed in 2019, and then the pandemic forced more and more people into self-employment. (1) Below we’ve constructed a guide to help self-employed professionals navigate the best retirement strategies.
1. What’s Your Number?
The first step is to calculate how much money you will need to retire comfortably. Fortunately, there are several online calculators, including this one from Nerdwallet, that can help you determine how much money you will need in retirement. Also, keep in mind that you may have your student loans and mortgage paid off by then.
So what’s your number? Well, it will vary for each individual and depend on a myriad of factors, including what your current salary is and what you plan on doing in retirement. Perhaps you want to downsize your family home and travel more. Or maybe you plan on retiring in a warmer climate where the cost of living is significantly lower. These factors all contribute to what your personal retirement number will be, but as a general rule, you will need at least 80% of your pre-retirement income to live comfortably. (2)
2. Which Retirement Account Works Best For You?
There are several different options of retirement accounts that self-employed people can tap into. The one that makes sense for you will depend, again, on your situation and how you plan on spending your retirement. Below are a few options to consider when charting out your wealth management strategy.
Solo 401(k)
Despite the word “solo” in its name, if you are in business for yourself but the business also has two or three other owners, your firm can utilize this retirement account. This retirement account closely resembles a traditional 401(k) and allows you to contribute up to $58,000, or $64,500 for those who are age 50 or older, to the plan pre-tax. You can only add employees to this plan if they are spouses of the owners. (3)
Cash Balance Plans
Many self-employed people who are advanced in their professional careers may have made the common mistake of not investing in their retirement when they were younger. This is understandable, and sometimes it cannot be helped as these self-employed people are busy developing their business when they are younger.
Cash balance plans are helpful for this demographic because they allow for higher contribution limits that increase with age. Self-employed people between the ages of 60 and 65 can contribute well over $200,000 to their cash balance plan.
IRAs
Traditional or Roth IRAs are also great options for the self-employed. If you have had a retirement account at a previous employer, you can roll over these accounts to an IRA that you maintain as a self-employed professional. With a Roth IRA, you contribute after-tax dollars, and your investment grows tax-free. Additionally, you can make withdrawals after age 59½ without incurring penalties. With a traditional IRA, you can contribute either pre-tax or after-tax dollars to the account and the investment grows tax-deferred. Withdrawals are then taxed as income after the age of 59½.
Another IRA that is ideal for self-employed people with a few or no employees is the simplified employee pension (SEP) plan. The SEP IRA offers tax breaks for self-employed individuals and business owners. The reason it works the best for business owners with few or no employees is that it requires proportional contributions for each eligible employee if you contribute for yourself.
Like the solo 401(k), the SEP IRA has higher contribution limits. The annual contribution limits cannot exceed the lesser of 25% of compensation or $58,000. It also can be combined with other plans, like a traditional IRA or a Roth IRA. (4)
Next Steps
There are many details to consider when you are self-employed and you are setting up a retirement account for yourself and/or your employees. Remember that there are many retirement options available to you, and if you need help deciding which particular retirement strategy would work for you, feel free to reach out to me at danielkorleski@cobaltprivatewealth.com or 719-332-3863 to schedule an introductory meeting
About Dan
Daniel Korleski is the President & CEO for Cobalt Private Wealth, where he helps his clients grow, manage, and protect their wealth so they can work toward a stronger financial future. With over 30 years of experience in the financial services industry, Dan has served as the managing director for Investment Trust Company, chief investment officer for the Wealth Management Group at American National Bank in Denver, and regional investment manager for the Greater Colorado Region of the Private Bank at Wells Fargo, where he oversaw the management of over $2 billion. In 2008, he was appointed by the mayor of Colorado Springs to the City’s Investment Advisory Committee. Dan holds an MBA in investment management from Midwestern State University in Wichita Falls, Texas, a Bachelor of Science in Finance from Florida State University, and is a member of both the CFA Society Colorado and The Financial Planning Association.
Dan loves to give of his time to his community and has served as Chair of the Board of Trustees of Pikes Peak Hospice Foundation, the Board of Directors of Catholic Charities of Central Colorado, President of the Broadmoor Rotary Club and Vice President of the Board for the Pikes Peak Chapter of Trout Unlimited. Dan was born and raised in Spain and is fluent in Spanish. When he’s not working, you can find him traveling around the world with his wife of 23 years, Montse, fly fishing, golfing, and hiking with his golden retriever, Curro. To learn more about Dan, connect with him on LinkedIn.
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(3) www.investopedia.com/retirement/401k-contribution-limits/
(4) https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-seps
