Does Being Self-Employed Mean You'll Have to Work Forever?

Man working in his home office
Self-employed people by definition must rely on themselves for their paychecks and their insurance. And then there's retirement funding. Without the benefit of a company 401(k) (and the potential employer match), saving for the future falls entirely on their own shoulders.

That's a lot to take on. Perhaps too much, if you look at the results of a recent TD Ameritrade (AMTD) study.

The company's Self-Employment and Retirement Survey found that even though the majority of self-employed people think that they'll live on their savings when they eventually stop working, 70 percent of them are not actually saving for retirement on a regular basis:
  • 28 percent of self-employed people report that they aren't saving for retirement at all.
  • 40 percent aren't saving regularly.
  • 83 percent have put their retirement savings on hold or cut back at one time or another, compared to only 70 percent of people who are traditionally employed.
While you might think that self-employed people assume they can live off their business profits, only 19 percent plan to fund their retirement through profits from the company which will continue to run after their retirement -- and only 14 percent think they'll be able to sell their business and live off the profits from the sale.

"One of the biggest challenges that self-employed people face is irregular income, so opening a retirement account is sometimes not top of mind," says Lule Demmissie, managing director of retirement at TD Ameritrade in Jersey City, N.J.
"But, once you have an understanding of what type of account is best for you, just go ahead and open it. You don't have to fund it right away, but having it open will make it easier to contribute money when you do come into a windfall. Having the foundation in place is a critical first step."

However, the picture is not entirely bleak for self-employed people.

When it comes to retirement readiness, the size of one's retirement account doesn't show the full picture, says Guy Penn, principal and founder of G.M. Penn Wealth Management in St. Louis.

A critical element not accounted for in the TD Ameritrade study is the self-employed person's unique capacity for income production, Penn says. "Many times, self-employed individuals forgo maxing out retirement savings to retain earnings in the business, and build an income-generating asset in the business itself."

And then there's the question of a person's need or desire to retire. "It's also very common that the self-employed love what they are doing and don't feel the desire to exit at 65," Penn says.

Retirement Tips for Self-Employed People

If you're self-employed and aren't preparing for retirement, financial advisors have several recommendations to help you get started.

"When I help self-employed folks, there are three questions that are important to help set up the correct plan for them," says Jeffrey Cutter, a CPA and PFS and owner of Cutter Financial Group, LLC in Falmouth, Mass. "First, how much do they make? Next, how much can they put away? Finally, do they have employees?"

Here's an overview of different retirement savings options for self-employed people.

SEP-IRA (Simplified Employee Pension). SEP-IRAs have a much higher contribution limit than traditional or Roth IRAs. The limits are based on a percentage of net profit for the self-employed. This plan works well for small, closely held partnerships, as each participant must be offered the same benefits under the plan.

"For higher-net-income folks who want to put more away, a SEP-IRA may be the best solution," says Cutter. He points out that a SEP-IRA is easy to maintain, offers many investment choices, and can be flexible in how it's funded. For 2014, an employer can contribute 25 percent of compensation up to a maximum of $52,000 per year.

Individual/Solo 401(k) for small businesses and self-employed. "An Individual 401(k) is most suitable for self-employed individuals or a business owner with no additional employees other than a spouse or a child," says Demmissie. "It allows business owners to make both employer and employee contributions, providing the ability to maximize their personal retirement contributions and their business deductions. You might consider this type of plan if your business has irregular profit patterns."

Solo 401(k)s are among the best option for the sole owner/employee setup, or a business without full-time employees, Penn says. The contribution limits are significantly higher than other employer-sponsored retirement plans, up to $52,000 in some cases, depending on the net profit of the business.

SIMPLE IRA. A SIMPLE IRA (Savings Incentive Match Plan for Employees) offers employees a salary-deferral contribution feature along with a matching employer contribution. You might consider a SIMPLE IRA if your business has steady income and your employees want to make contributions to a retirement plan.

"The SIMPLE IRA is a good plan for those who wish offer an incentive for employees, but want to avoid the higher administrative paperwork that goes along with traditional 401(k)s," says Penn.

Profit-sharing retirement plan. For a business owner who has variable profits but wants to reward long-term employees by giving them a percentage of the company's profits, a profit-sharing retirement plan may be a good choice, Demmissie says. The plan is very flexible. "The employer decides how much he or she wants to contribute each year and can even skip years if necessary."

Take your future into your own hands. "Self-employed people are often the CEO, COO, CFO, and Director of HR, with so many decisions facing them on a daily basis," says Cutter. "Life is all about decisions; the ones we make and the ones we fail to make. If you haven't set up a retirement plan yet, decide today to get it done. The only person you're hurting is yourself."

For more information on retirement plans for the self-employed, see IRS Publication 560, Retirement Plans for Small Business.

Michele Lerner is a Motley Fool contributing writer and has no position in any stocks mentioned. The Motley Fool recommends and owns shares of TD Ameritrade.

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My late father was self-employed. He retired the year he died. But he paid into social security and my mother received a check for the next 28 years, until her death.
My father saved money and provided for my mother after he was dead.
When we were kids, my father paid into Blue Cross for us.
My father worked hard to be a good provider for us.

February 09 2014 at 4:01 PM Report abuse +2 rate up rate down Reply

good day,

in fact...being self-employed...i would love to "work forever"! opposed the the pinheaded corporate twits...or public employees...that regularly whine/complain and can't wait 'til the day they can sit at home and watch re-runs of bonanza and over-utilize the health care system for every ache and pain.. do i have enough for retirement? i don't give a rat's ass because i love what i do and will keep plugging away until the day my kids contemplate what should be engraved on my tombstone.

February 09 2014 at 1:13 PM Report abuse -3 rate up rate down Reply

There are plenty of retirement plans and options for the self employed. They actually have as many or more options than regular employed folks. This article assumes most self employed people are imbeciles.

February 09 2014 at 10:36 AM Report abuse -1 rate up rate down Reply

Being self employed,assuming you are even modestly successful,allows you to get a raise whenever you want,take time off when you want and not have to worry about calling in sick. You want to make more money ? Just get more business.

February 08 2014 at 3:56 PM Report abuse -5 rate up rate down Reply
1 reply to flip33732's comment

You\'re kidding, right?
I got a raise when I paid off another bill, maybe. Try making eight truck payments a month, holding back money to cover the slow season. When i was sick I still worked. The office still goes on and the employees expect their checks on time.
You obviously haven\'t run a small business.

February 09 2014 at 12:38 AM Report abuse +3 rate up rate down Reply
1 reply to nyhuguenot's comment

People don't realize when it is busy you work hard, and when it is slow you work harder.

February 09 2014 at 2:59 AM Report abuse +3 rate up rate down

I've had my own business for 11 years now and I would never go back to working for anyone. I don't have any employees, tried that and lost accounts due to them being completely stupid. Now I just work by myself, paying my house off, buying rental properties and keeping cash on hand for anything I may need. I invest in the stock market money I don't ever plan to need and I forget about it. I have a Roth IRA that I contribute to and forget about that as well. Not married, no kids and man I tell is so simple! All my friends are grumpy, broke, complain ALL THE TIME and don't make any money. I try to tell them to start their own business but they are clueless. Leaves more opportunity for me when people's heads are in the sand!

February 08 2014 at 1:56 PM Report abuse rate up rate down Reply
1 reply to davefromfwb1's comment

Oh and I forgot to say...I love what I do...I don't even consider it work. I'm going to work until I can't work anymore and then I'll be sad I'm not doing it anymore. At that won't mean anything to me. Money now really doesn't mean anything to me...that's why I get rid of it by investing, paying things off and living cheap.

February 08 2014 at 1:57 PM Report abuse -1 rate up rate down Reply

Self employed have the biggest benefit of all, \"cash no receipt\". Many will never divulge their true ioncome, so they re saving for retirement, just won\'t admit it. And don\'t forget the perks, company car, company paid insurance, company funded retirement, and a host of other pre tax perks that are commonly done; for instance the landscaper for the company also roles the owners personal residece in the company bills.

February 08 2014 at 10:39 AM Report abuse -3 rate up rate down Reply
2 replies to dodie1990's comment

You are assuming that the self-employed person is incorporated & has all of that stuff. The vast majority of self-employed people are not incorporated, so there is no company car, company insurance, company landscaper. The self-employed person is most likely that landscaper. Many are free-lance writers, musicians, even tailors & seamstresses. My dad was a golf pro.... self-employed golf instructor. The only tax write-off he got was when he bought himself a new set of golf clubs or when he wrote off travel expenses & entry fees for golf tournaments.... but at the time, he could only write those off if he won money at the tournament. If he lost, he lost all the way around.

February 08 2014 at 11:23 AM Report abuse +3 rate up rate down Reply

I am an accountant - you are sooo correct

February 08 2014 at 7:31 PM Report abuse rate up rate down Reply

My job is here in our home. When do I get to retire from all the cooking, cleaning, and laundry while he sits in front of the TV requesting a drink or coffee. When is it my turn?

February 08 2014 at 10:22 AM Report abuse -1 rate up rate down Reply
1 reply to Kay's comment

Maybe you should have discussed a few details before you tied the knot. Most guys aren't up for changing the home dynamics after you say "I do." Heck, my wife makes me bring her drinks while SHE watches tv!

February 08 2014 at 1:51 PM Report abuse +1 rate up rate down Reply

I enjoyed working for myself for almost 30 yrs. Some were good and some were bad financially. So I learned to save as much as possible. That has worked out great. Now i can look back at working 60 plus hours a week with pride. I would never would trade the experience for working for someone. Now still working but part time for myself . The secret is to save as much as you can and also not spending
money unless you really need to..........loving my freedom now!

February 08 2014 at 5:58 AM Report abuse +4 rate up rate down Reply

Being self employed has its good points and bad points. After years of working for small businesses with no benefits I went on my own. Pulled down $20,000-30,000 a month for about 10 years, until my ex decided she didn't need me anymore. When it was over the business was dead, my house was gone and almost all my savings. I went to law school and got a government job. After 12 years I got sick and couldn't do the job anymore, but not disabled where I couldn't work (it's complicated). I went back into business. I wish I could say how things just turned around and going great, but this time things are not great. The world is not the same as it was 12 years ago. Using up the savings instead of adding to them. Paying a lot for health insurance (no subsidies) and having to decide at what point to pull the plug or switch gears. Sometimes I miss that paycheck twice a month. I also find being self employed, my boss is a slave driver who makes me work 60+ hours a week.
The good thing is, I learned to be flexible and roll with the punches. I can switch what I do quickly (and hopefully correctly) without any down time. How much money I will make is another question.

February 08 2014 at 2:38 AM Report abuse rate up rate down Reply

I'd much rather be self-employed and be my own boss than ever again have to join the traditional rat-race traditional job force. One does not have to put up with jealous backstabbing co-workers, cliques in the office, gossip, or someone smashing a bug and putting it in your bottle of soda (yes I had that happen to me). A self-employed person can learn to save and manage money quite effectively. Self-employment to me is the way to go.

February 07 2014 at 7:10 PM Report abuse +7 rate up rate down Reply