I'm Self-Employed. How Do I Save for Retirement?

When you're a business owner, it can be hard to set money aside for retirement. Income is variable, and you're constantly reinvesting in the business. Even if you do have the revenue to save, it's just as difficult to determine the best place to put it.

I'll cover the unique challenges business owners face when it comes to saving for retirement. How business owners can overcome those challenges. And the different savings options that are available for you and your employees.

It's harder to save

Being a business owner comes with trade-offs. Income can be inconsistent. After expenses, you must decide whether to pay yourself or reinvest. At the same time, taxes restrict what could be saved.

On top of the ongoing financial difficulties, there's a laundry list of things that need to get done in the business. The time you would spend managing finances is replaced with hiring, payroll, business development, and so on… When you're busy, it's easy for retirement planning to get placed on the back burner.

But saving for retirement is still important. It gives you freedom later in your career. It gives you a cushion so you don't have to "fire sale" the business at retirement. And gives you breathing room so the success of your retirement (whatever that may look like) doesn't rely solely on the business.

How do you overcome the savings challenge?

The truth is, it never gets easier. The business will always throw you a curveball.

• Expenses increase.
• A key employee leaves the business.
• The regulatory landscape shifts out of your favor.
• Something will break, and you will be the one fixing it.

There will be no perfect time to get started. The key is to build financial management systems between business and personal accounts. This could look like:

• A percentage of business profits directed to personal accounts.
• A system to manage owner distributions, quarterly taxes, CapEx, and savings.
• Systems to manage revenue pipelines and future expenses.
• Or simply automating your savings contributions.

How those systems get set up and what they look like are highly dependent on the stage and nature of the business. A high-margin business with predictable cash flows operates differently than a low-margin business relying on turnover. An early-stage business may need simpler management systems, while a mature business needs a more granular approach.

Retirement savings options for self-employed

The 401(k) plan is widely recognized when considering retirement plans, but it's one of many options. Plans vary by costs, how benefits are structured, how much participants can contribute, compliance requirements, and much more.

In some cases, the business retains investment risk, promising employees a defined monthly benefit. In other cases, the investment risk shifts to the employee, and their account balance at retirement is what they have to live on.

If you do not have employees:

• SEP IRA
• Solo 401(k)
• Traditional & Roth IRA
• Cash Balance Pension
• Defined Benefit Pension

If you do have employees:

• SEP IRA (although it's less common in this scenario)
• Simple IRA
• Defined Contribution (Traditional 401k or 403b)
• Cash Balance Pension
• Defined Benefit Pension

Which option suits you is highly dependent on your savings goals, taxable income, employee ages, income stability, and much more. Some plans (like the SEP IRA) are simple to set up, requiring little money or effort to get started. Others (like the Defined Benefit or Cash Balance Pension) require more money and energy to maintain.

The benefit, aside from retirement income

All of the retirement saving options mentioned have one thing in common - tax advantages. Excluding Roth, contributions are tax-deductible up to a certain limit. What you contribute (up to that limit) is subtracted from your gross income, thus lowering your tax bill.

In some cases (like the Cash Balance Pension), that limit is significant. If you have employees, matching and/or profit sharing contributions are tax-deductible for the business.

On top of the tax deductions, retirement plans (again, excluding Roth) allow you to defer your tax bill to retirement - when taxes are potentially less painful. The question all business owners must ask themselves is, "Will my marginal tax bracket in retirement exceed my marginal tax bracket today"?

As you can imagine, there are many moving parts when selecting the best retirement savings option for you and your business. In some cases, a blend of options makes sense. In others, simplicity beats complexity. In any case, a retirement planner can help you understand plan types, their tradeoffs, and tax implications.

How a retirement planner can help when you're self-employed

At Voyage, we help our self-employed and small business owner clients:

1. Choose the Right Plan: A planner can help you compare options like a SEP IRA, Solo 401(k), or Defined Benefit Pension and identify the plan that best aligns with your income, employee count, tax obligations, and savings goals.
2. Maximize Tax Efficiency: Retirement contributions can lower your taxable income, but only when coordinated properly. Advisors can integrate your business deductions, estimated taxes, and contributions into one cohesive strategy.
3. Align Business and Personal Goals: For many business owners, the business is their largest asset. A financial advisor helps you balance reinvesting in your company with personal savings.
4. Stay Consistent and Accountable: When income fluctuates, it's easy to pause contributions. When business gets busy, financial management can go on hold. Advisors can help you set up automated systems, adapting them as your business grows, so your savings stay on track.
5. Plan for Retirement Vision: Whether you want to sell your business, scale back, or transition into passion projects, an advisor can help you build a roadmap that connects your values, lifestyle, and legacy goals.

Whether you're improving an existing 401(k) or setting up your company's first one, we'll help you find a plan that fits your business and your employees.

Ready to get started? Schedule a call with a retirement planner.