Solo entrepreneurs face a critical financial challenge: How to save for retirement

Everyone has to save for retirement.

If you have a job with a company that offers retirement savings, you are in luck. You sign up (or you might be enrolled automatically) and then contribute through your paycheck. You don’t have to do a thing.

But when you’re an independent entrepreneur, you have to come up with your own plan.

About 16 million Americans were self-employed as of July, according to the Bureau of Labor Statistics, but when you factor in both self-employed Americans and the people who work for them, the figure is about 30% of the workforce.

Self-employed people and small business owners should be concerned about their retirement savings, since just 13% of those tax filers participate in a workplace retirement plan.

There’s good news for those self-employed folks: It’s not that different from participating in a company 401(k) plan or 403(b). There is one catch, however. You need to set up the savings on your own and be disciplined about stocking it with cash.

Not saving for retirement, of course, means you are paying more in taxes than you need to.

“The government has incentivized saving,” said Chad Parks, founder and CEO of the retirement plan provider Ubiquity Retirement and Savings in San Francisco.

An easy calculation you can make to help you understand how this works, Parks says, is to imagine someone who pays around 30% of their salary in taxes.

If this person can set aside $1,000 a month, $300 of that is the money that would otherwise have gone to taxes, Parks said. “The out-of-pocket is only $700 to be able to save $1,000,” he said. “I call it the government match.”

The choices of retirement plans can seem overwhelming.

“The real differentiator is, can you save more than $500 a month?” Parks said. A monthly amount makes it understandable, so you can compare the number to other fixed expenses.

That $500 adds up to $6,000 over a year, the individual retirement plan limit for 2020. If you’re older than 50, you can save $7,000.

Opening an individual retirement account is the simplest thing to do and, if you’re not going to save more than $500 a month, it’s a good choice, Parks says.

You can open an IRA at almost any institution, including banks, credit unions and investment houses.

“If you’re under 40, a Roth IRA is probably the better option because you have decades before retirement,” Parks said, referring to an IRA initially funded with after-tax dollars that you can tap in retirement entirely free of taxes. For those who are older and investing more conservatively, a traditional IRA — where you get the tax break the year you put the money in but pay taxes later on distributions — is probably the right alternative.

Check online tools and calculators to decide between a traditional IRA and a Roth IRA.

Once you open your account, set up an automatic transfer to sweep a deposit into your retirement account so you don’t have to think about it. “Tie this to your paycheck,” Parks said, whether that’s once or twice a month.

Julie Berninger, 30, was looking for a way to stash more retirement cash than her tech job allowed.

She saves at higher-than-typical levels because she’s a proponent of the FIRE movement (financial independence, retire early).

“That is why I save a significant amount of money,” Berninger said. “From an entrepreneurial point of view, having the savings can give you the confidence to go out on your own.”

Berninger had a flash of insight and realized that she could save more for retirement if she opened a solo 401(k). It turned out to be the perfect choice for the Seattle resident, who has several side hustles, including a personal finance podcast and an Etsy shop.

The simplified employee pension IRA is another possibility. SEP IRA accounts have higher savings limits than a traditional IRA, but contributions are calculated differently. As a business owner, you can contribute whichever amount is lower: 25% of your earnings or as much as $57,000 a year.

That limit might make the solo 401(k) plan more attractive, since the amount you defer is entirely up to you, as long as you stay within the contribution limits. “If you earn $19,500 and want to put it all into a self-employed 401(k), you could,” Parks said. “That would reduce your taxable income to zero.”

The maximum amount a self-employed individual can contribute to a solo 401(k) for 2019 is $56,000 if they are younger than 50. Individuals 50 and older can add an extra $6,000 per year in “catch-up” contributions, bringing the total to $62,000. Most major providers — including Fidelity, Schwab and Vanguard — offer a solo 401(k).

You may have heard amounts ranging from 10% to 20% of your salary as the percentage you should save for retirement. If you’re dealing with multiple financial obligations — rent, student loans, credit card bills — that can be daunting.

It sounds cliched, but it’s a fact, says Rick Irace, head of service and operations for Ascensus’ retirement division in Dresher, Pennsylvania. The importance of saving any amount and doing it consistently can’t be overstated. “Every little bit helps when it comes to saving for retirement,” he said.

Just as critical is discipline. “Someone who is stretched thin financially can start by simply setting 1% of their pay aside,” Irace said.

You can ease into saving without feeling too much pain. Set a goal of increasing this amount by a percentage point or 2, until you reach your target, Irace says.

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Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.