How to Plan for Retirement When You’re Self-Employed
Self-employed individuals can successfully plan for retirement by choosing the right accounts, saving consistently, and preparing for healthcare costs.
Self-employed? Planning for retirement can feel overwhelming, but it doesn’t have to be. Here’s what you need to know:
- Key Challenges: No employer benefits, double tax responsibilities, and irregular income make saving harder.
- Retirement Accounts: Options include SEP IRAs (simple, flexible), Solo 401(k)s (higher limits, dual contributions), and Traditional/Roth IRAs (great for supplemental savings).
- Savings Goal: Aim to save 10-15% of your income consistently, even during high and low earning months.
- Healthcare Costs: Plan for rising healthcare expenses, which could cost $165,000+ in retirement.
- Diversify Investments: Go beyond your business - consider index funds, real estate, and HSAs for tax benefits.
Quick Comparison of Retirement Accounts
| Feature | SEP IRA | Solo 401(k) | Traditional/Roth IRA |
|---|---|---|---|
| 2025 Contribution Limit | $70,000 or 25% of compensation | $70,000 (employee + employer) | $7,000 ($8,000 if 50+) |
| Setup Complexity | Simple | Moderate | Very Simple |
| Loan Options | No | Yes | No |
| Roth Option | Yes | Yes | Yes |
| Best For | Variable income, simplicity | Maximizing savings | Supplemental savings |
Start today: Save consistently, automate contributions, and diversify your investments. The earlier you start, the more secure your future will be.
How to Save for Retirement when Self Employed
Self-Employed Retirement Account Types
For self-employed individuals, there are several retirement account options designed to match different income levels and business needs. Let’s break them down.
SEP IRA: Ideal for Variable Income
The SEP IRA (Simplified Employee Pension Individual Retirement Account) is a great choice for those with fluctuating income. In 2025, you can contribute up to the lesser of $70,000 or 25% of your compensation. It’s easy to set up, has no ongoing fees, and contributions are tax-deductible while growing tax-deferred. If simplicity and flexibility are priorities, this account might be the right fit.
Solo 401(k): Dual Contribution Advantage
A Solo 401(k), also called an individual 401(k), offers the unique benefit of allowing contributions both as an employee and as an employer. For 2025, you can contribute up to $23,500 as an employee and an additional 25% of your compensation as the employer. Combined, the total contribution limit is $70,000 for those under 50. If you’re 50 or older, catch-up contributions increase the limit to $81,250. While it requires a bit more paperwork, this account is excellent for maximizing savings.
| Feature | SEP IRA | Solo 401(k) |
|---|---|---|
| 2025 Contribution Limit | $70,000 or 25% of compensation | $70,000 total ($23,500 as employee + 25% as employer) |
| Setup Complexity | Simple | Moderate |
| Loan Options | No | Yes |
| Roth Option | Yes | Yes |
| Best For | Variable income, simple administration | Maximum savings, no employees |
Basic IRAs: A Supplemental Option
Traditional and Roth IRAs are excellent for adding an extra layer of retirement savings. For 2025, you can contribute up to $7,000, or $8,000 if you’re 50 or older. These accounts are simple to manage and can complement your primary retirement plan.
- Traditional IRA: Contributions may reduce your current taxable income, offering immediate tax savings.
- Roth IRA: Contributions aren’t tax-deductible, but qualified withdrawals in retirement are entirely tax-free.
- Added Flexibility: Both options can be maintained alongside your primary retirement account.
When deciding which accounts suit you best, consider your financial goals and how much complexity you’re willing to handle. A SEP IRA is perfect for those who value simplicity and need flexibility for variable income. A Solo 401(k) is ideal for those looking to maximize retirement contributions and don’t mind a bit more administrative effort. Basic IRAs, on the other hand, provide an easy way to supplement your savings. By combining these options strategically, you can build a solid retirement plan that adapts to your income and business changes.
Calculate Your Retirement Numbers
Income Replacement: The 70-80% Method
To estimate how much you'll need in retirement, aim to replace 70-80% of your pre-retirement income through a mix of personal savings and Social Security benefits. Research indicates retirees typically use anywhere from 54% to 87% of their previous income, depending on their lifestyle choices.
Here’s how to calculate your target retirement income: Multiply your current annual earnings by 0.75 to get a baseline figure. Then, subtract your expected Social Security benefits. For example, if you currently earn $100,000 annually, your target might be $75,000. Any gap between this amount and your benefits will need to come from savings. Don’t forget to factor in rising living expenses and healthcare costs as you plan.
Plan for Rising Costs and Healthcare
Healthcare is one of the most significant expenses in retirement. A 65-year-old couple, for instance, might need about $315,000 in after-tax savings for healthcare, while an individual could require around $165,000.
"You could call healthcare the biggest retirement expense people fail to plan for. Many folks just assume Medicare is going to pay for everything but, in reality, it only covers about two-thirds of your costs." – Ben Storey, director, Retirement Research & Insights, Bank of America
When preparing for healthcare expenses, keep these factors in mind:
| Expense Category | Expected Costs | Planning Considerations |
|---|---|---|
| Medicare Part B | $174.70/month | Costs may increase based on income |
| Healthcare Inflation | 1.5–2× general inflation | Plan for higher-than-average inflation rates |
Use Online Retirement Tools
Regularly review your retirement projections to stay aligned with your goals. When using online calculators, input key details like:
- Your current age and desired retirement age
- Estimated costs for your retirement lifestyle
- Anticipated investment returns
- Inflation rate (typically around 3%)
- Healthcare expense projections
- Current retirement savings
- How much you can save monthly
Tools like Charles Schwab's Small Business Retirement Contribution Calculator can help you refine your plans.
Also, consider the three phases of retirement - often called the "go-go, go-slow, no-go" years. In the early years, you may spend more on activities like travel, while later stages often see reduced discretionary spending but higher healthcare costs.
Save Regularly Despite Income Changes
Saving consistently, even when your income fluctuates, is key to staying financially secure and building a solid retirement plan.
Set Aside Profits First
Start by adopting a pay-yourself-first approach. With around 36% of the U.S. workforce - roughly 58 million people - working independently, saving in a structured way is more important than ever. Begin by calculating your essential monthly expenses, then allocate your income into specific accounts based on priorities:
| Account Purpose | Allocation Percentage | Priority Level |
|---|---|---|
| Self-Employment Taxes | 15% | High |
| Retirement Savings | 15-20% | High |
| Emergency Fund | 10% | Medium |
| Operating Expenses | 40-45% | Medium |
| Personal Spending | 10-20% | Low |
"The biggest mistake is having no plan." - Matteo Hoch, Tax Professional and Financial Advisor at Bird Spring Financial
Take advantage of high-income months to increase your savings and stay ahead.
Schedule Savings in Peak Months
With freelancers expected to make up over 50% of the U.S. workforce by 2027, it’s critical to use your most profitable months wisely. During these times, automate transfers to your retirement accounts to ensure you're consistently saving. Automation not only simplifies the process but also keeps you disciplined, helping you build a strong financial foundation, including an emergency fund.
Build a 6-Month Safety Fund
Having an emergency fund is essential for maintaining consistent retirement contributions, especially during tough times. According to Bankrate, only 44% of Americans can cover a $1,000 emergency from savings. Aim to set aside six months' worth of expenses for emergencies, and keep these funds separate from your retirement and business accounts.
"You can't put off planning for your future until the perfect moment arrives... Because there is no perfect moment. Saving a little bit now is always better than waiting and saving nothing." - Chris Kawashima, CFP®, senior research analyst at the Schwab Center for Financial Research
If your income is seasonal or project-based, consider extending your safety net to nine to twelve months' worth of expenses. This extra cushion ensures you can continue contributing to retirement, even when business slows down.
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Invest Beyond Your Business
Building a secure financial future means looking beyond your business and diversifying your investments. By spreading your savings across different asset types, you can better protect yourself from market fluctuations and business-related risks. While consistent saving is essential, diversifying your portfolio adds an extra layer of security.
Business Growth vs. Personal Savings
Keeping your business finances and personal savings separate is crucial, especially when it comes to safeguarding your retirement funds during tough times.
"Paying yourself first means saving before you do anything else. Try and set aside a certain portion of your income the day you get paid before you spend any discretionary money."
Once you've established a solid saving habit, consider broadening your portfolio with options like low-cost index funds and real estate.
Add Index Funds and Real Estate
Index funds are a straightforward way to diversify your investments without high costs. For example, in 2024, only 13.2% of actively managed U.S. stock funds outperformed the S&P 500's impressive 25% gain. This makes index funds a smart choice for many investors.
Here are some popular low-cost index funds:
| Index Fund | Minimum Investment | Expense Ratio |
|---|---|---|
| Fidelity Zero Large Cap Index (FNILX) | No minimum | 0.00% |
| Schwab S&P 500 Index Fund (SWPPX) | No minimum | 0.02% |
| Vanguard 500 Index Fund - Admiral (VFIAX) | $3,000 | 0.04% |
"The average investor needs only to invest in a broad stock market index to be properly diversified."
Real estate can also be a valuable addition to your portfolio, especially through self-directed IRAs or Solo 401(k)s. If you choose this route, keep these tips in mind:
- Purchase properties outright with cash to avoid mortgage-related complications.
- Keep personal and investment properties strictly separate.
- Use your retirement account to cover all property-related expenses.
- Follow IRS rules to ensure compliance, particularly regarding property usage.
Use HSAs for Tax Benefits
Health Savings Accounts (HSAs) are another tool worth considering. They offer triple tax advantages: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are also tax-free.
"Every dollar you lose to taxes is one less dollar in your pocket. Holding different account types helps manage uncertainty around future tax rates because we don't know in 20 to 30 years, what the tax regime will be or what your personal tax rate might look like."
"True diversification protects you from loss because, even if one [of] your investment holdings completely tanks, it won't drag down the rest of your portfolio."
The 2008–2009 financial crisis highlighted the importance of diversification. During that period, portfolios with a mix of assets held up better than those concentrated in a single investment type. By spreading your savings across various asset classes, you can create a more resilient and stable financial future.
Conclusion: Start Your Retirement Plan Today
Retirement planning for the self-employed doesn’t have to be complicated - it just requires taking action today. As Alvin Carlos, CFP®, CFA at District Capital puts it:
"Starting early means that you have adequate time to plan, have an allowance for making mistakes, be more financially stable, earn higher returns, and retire early to live the life that you want".
Here’s a striking example: If you start saving at age 25, contributing $200 monthly with a 7% annual return, you could accumulate $525,000 by age 65. But if you wait until age 35 to start, that total drops to $244,000.
The steps to begin are simple: Use online tools to calculate your retirement needs, review your cash flow to decide how much you can contribute regularly, pick the right retirement account, and set up automatic contributions of 10–15% of your income.
"Time is fleeting, and you don't want to regret not putting away even small amounts when you can."
– Chris Kawashima, CFP®, Senior Research Analyst at the Schwab Center for Financial Research.
Adding to the urgency, Social Security benefits could face a 22% reduction by 2034, making personal savings even more essential. As Shawn Maloney, founder of Retire Wise, explains:
"Balancing short-term needs with long-term goals can be tricky, but prioritizing savings early keeps immediate expenses in check while building future security".
To make the most of these strategies, consider working with a financial advisor. They can guide you in choosing the right retirement accounts, optimizing your tax strategies, and designing a savings plan that fits your fluctuating income while taking advantage of the investment options discussed earlier.
FAQs
What’s the difference between a SEP IRA and a Solo 401(k), and how can I choose the right one for my self-employed retirement plan?
The Key Differences Between a SEP IRA and a Solo 401(k)
When comparing a SEP IRA and a Solo 401(k), the main distinctions come down to contribution limits, eligibility, and complexity. A Solo 401(k) often allows for higher contributions because you can contribute in two ways: as an employee and as an employer. For 2025, this means you can contribute up to $23,500 as an employee, plus up to 25% of your income as an employer, with a total limit of $70,000 if you're under 50 - or $76,500 if you're 50 or older.
In contrast, a SEP IRA only allows employer contributions, which are capped at 25% of your income or $70,000 in 2025, whichever is lower.
When deciding between the two, it’s important to weigh your income level, retirement savings goals, and how much effort you’re willing to put into managing the plan. If your priority is maximizing contributions, a Solo 401(k) might be the way to go. But if you value simplicity and want to avoid extra administrative work, a SEP IRA could be the better choice. Both are excellent retirement options for self-employed individuals, so the best choice will depend on your unique financial situation and long-term objectives.
How can self-employed individuals save for retirement with an unpredictable income?
Saving for retirement when your income varies as a self-employed individual takes careful planning and adaptability. A good starting point is to open a retirement account tailored for people in your situation, such as a SEP IRA or a Solo 401(k). These accounts let you contribute a portion of your income, with the flexibility to adjust contributions based on what you earn each month. For instance, in 2025, you can contribute as much as $66,000 to a SEP IRA, depending on your net income.
To keep your savings on track, craft a budget that factors in your unpredictable income. Commit to setting aside a fixed percentage from every payment you receive, and whenever possible, automate those contributions. This method helps you develop a consistent saving habit, even when your earnings fluctuate. With dedication and the right strategies, you can build a solid foundation for a secure retirement, even with an irregular income.
How can I plan for healthcare costs in retirement as a self-employed individual?
Planning for healthcare costs in retirement is especially important when you're self-employed. One smart move is contributing to a Health Savings Account (HSA) if you're enrolled in a high-deductible health plan. HSAs let you set aside pre-tax dollars specifically for medical expenses. The best part? The funds grow tax-free, making it an effective way to prepare for future healthcare needs.
Another key step is increasing contributions to retirement accounts like a SEP IRA or Solo 401(k). These accounts not only help you save for retirement but also provide a financial safety net for covering medical expenses down the road. Don't forget to plan ahead for Medicare enrollment to ensure you have continuous coverage and avoid any gaps. It’s also a good idea to budget for out-of-pocket healthcare costs as part of your broader retirement strategy.
To further safeguard your finances, consider looking into long-term care insurance. This type of coverage can help manage the costs of extended care, which Medicare might not fully cover. By using a mix of these strategies, you can create a solid plan to handle healthcare expenses during retirement with greater confidence.