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Self-Employed Workers Are More Confident About Retirement, but Shouldn't Be

By Kailey Hagen - Aug 16, 2019 at 11:45AM

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They're better at retirement savings than traditional workers, but many are still not putting aside anywhere near enough.

Self-employment brings greater freedom and flexibility in your professional life -- and often a larger paycheck, too. This in turn gives many self-employed workers a more positive outlook on their future, including retirement, but this confidence might be a little misplaced.

Nearly two-thirds of self-employed workers are confident that they can retire comfortably, according to a recent Transamerica study, with 24% saying they are very confident about their plans. But their account balances tell a different story.

Mature woman on laptop looking out window

Image source: Getty Images.

How prepared are the self-employed for retirement?

The study showed that self-employed workers are indeed doing a better job at saving for retirement than their traditionally employed counterparts, but these numbers are far from adequate. Self-employed workers have an estimated median retirement savings of $71,000, while self-employed baby boomers have an estimated median of $173,000. This is better than the respective $50,000 and $152,000 that employed workers and baby boomers had saved, but it's a far cry from the true costs of retirement.

No one can know exactly how much retirement will cost, but it's likely you'll need $1 million or more, and a recent Charles Schwab survey placed the average cost of retirement for today's workers at around $1.7 million. You won't have to save all of that yourself because Social Security will cover some of your costs, but how much you'll receive depends on your average indexed monthly earnings (AIME) during your working years, the age you begin taking benefits, and the changes the government makes to the program in the coming decades. If you want to estimate how much Social Security may cover for you, create a my Social Security account to find out.

The Transamerica survey pointed out more troublesome signs that the self-employed aren't as prepared for retirement as they think. Nearly half of the self-employed workers admitted to guessing about how much they'd need to cover their retirement expenses, and the average estimate was $500,000. And 22% of self-employed workers also admitted they have no idea how their retirement savings are invested, compared with just 18% of employed workers. This could be costly if their money is invested in mutual funds with expensive annual fees or in poorly performing assets that aren't growing much over time. 

Among the 63% of self-employed workers who claim to have a retirement strategy, only 18% have written it down, and many have forgotten to include expenses like long-term care, taxes, estate planning, and contingency plans. These oversights could be part of the reason self-employed workers' estimates of what they need for retirement were so low, and those that don't amend their retirement plans to include these expenses could end up running out of money prematurely.

How self-employed workers can get their retirement back on track

The most important thing self-employed workers can do for their retirement is to create a written strategy encompassing all of their basic living expenses and the often-overlooked factors listed above. Multiply monthly expenditures by 12 to get estimated annual retirement expenses. Next, estimate how long you think you're going to live by subtracting your planned retirement age from your estimated life expectancy (plan to reach at least 90 if you're reasonably healthy).

Multiply your annual retirement expenses by the number of years of your retirement, adding 3% annually for inflation. A retirement calculator will do this for you. If it asks about investment rate of return, choose 5% or 6% to be conservative. It should then tell you how much you need to save per month and overall to hit your goal. Subtract any money you expect to get from Social Security to figure out what you need to save on your own.

Take steps to increase your retirement savings if you find out you're not doing enough. Try cutting back your discretionary spending or working a little extra if you can't afford to save as much as you'd like to. A financial adviser may also be able to help you come up with a clear strategy. Just make sure you choose a fee-only adviser and not one who earns commissions, because this can create conflicts of interest.

Another option 60% of self-employed workers surveyed are considering is working part time in retirement or not retiring at all. It's up to you to decide whether this strategy appeals to you, but it can considerably reduce how much you need to save for retirement. Don't use this as a reason to slack on your savings, though, because you never know if an injury or illness will leave you unable to work even if you want to.

Look into a Simplified Employee Pension IRA (SEP IRA) or a Solo 401(k) if you plan to exceed the $6,000 IRA contribution limit for 2019 ($7,000 if you're 50 or older). These accounts are designed for the self-employed and enable you to set aside more money for your retirement without running into costly excess-contribution penalties.

Whether you're self-employed or not, prioritizing retirement savings is essential if you ever hope to stop working or if you're concerned that a health issue could force you out of work. Create a retirement plan using some of the above tips to keep yourself on track for the retirement you envision.

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