13 Tips: Retirement Planning for Entrepreneurs or Self-Employed Freelancers

tips for retirement planning

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You are an entrepreneur starting your small business online. You’ve read the ebooks and guides, and you understand how to define a minimum viable income (MVI) and build a financially-sound business. But have you thought about planning for retirement? As a self-employed freelancer, do you know how your finances will look like once you retire, how much S.S. pension you will get, and how much do you need to save to supplement your Social Security S.S. checks? Do you know what will be the value of your business when you are ready to stop your activities?

I just turned 60 and got recently divorced. I have been a successful freelancer and entrepreneur for almost 20 years. But along the way, I have made some financial choices that I came to regret. Let me share with you some traps you should avoid and some tips to consider to better plan for your retirement as a freelancer or entrepreneur.

Don’t make the mistakes I made!

Note: What I am sharing here is simply my experience and some “food for thought.” I am not a financial advisor.
This article does not provide tax, investment, or financial advice.

1- The danger of minimum viable income: If you are an entrepreneur or you are dreaming of becoming one, I guess that you’ve read about minimum viable income. The idea is to take a hard look at our expenses to define the minimal amount of money we can live on and make entrepreneurship a reality. Fizzle has a detailed article on the topic, titled: “How to Afford an Entrepreneurial Lifestyle: A Comprehensive Guide to Minimum Viable Income.” The concept is not wrong as long as you understand that this is a level of income you need to get you started rather than the income you can live on for years. I wish that writers and consultants promoting that concept would express that word of caution more often. A self-employed freelancer or small business owner must also think about the impact of short-term financial decisions on their long-term situation.

2- Mastering your budget: If Fizzle explains how to define fixed expenses and variable expenses to set your budget, using a simple spreadsheet, the reality is that most people will quickly give up because life is not that simple. Unexpected expenses occur and throw the whole budget out of the window. I know it happened to me – until I discovered YNAB. I am not trying to promote YNAB here, but it drastically changed my life. The power of the YNAB app is that it understands that the unexpected will happen, and it allows you to move some money from one category to another to account for the unplanned expenses. It also allows you to put aside funds every month, that you know you will need at some point to replace your laptop, repair your car, go on vacation, or simply pay for Christmas gifts. That way, you don’t have to struggle when those events come!

3- Why you must master your budget: As an entrepreneur, if you don’t have a firm handle on your budget and your expenses, how can you make the right choices when it comes to planning for retirement? You’ll always feel that you just don’t make enough money to save. You’ll be concerned with the irregularity of your monthly income. But once I had a clear understanding of how much I was spending on food, rent, clothing, etc. each month, then I discovered my ability to save.

suitcase travel enjoy retirement
Photo Credit: STIL

4- Disability insurance, vacation, and sick days: While I am on the topic of allocating money for “rainy days,” I’ll also suggest that you understand how you will deal with the reality of getting sick or having an accident, which prevents you from working for a while. You probably want to look at disability insurance. And, if these hourly rates of $125-150 seem high to your customers and even yourself, be aware that they also pay for when you are sick or when you want to take a vacation! No paid holidays from your employer for you!

5- Understanding the real value of your company upon retirement: A 2017 survey revealed that 18% of entrepreneurs believe that selling their business will fund their retirement. But the reality is that, if you are a consultant, for instance, YOU are the company. The company has no value beyond you. I had an accountant who told me once not to take any salary because there was value in my company. Looking back, I believe that was a mistake. I’ll expand on this in the next bullet.

6- Choosing your type of remuneration: Your activity can be as a sole proprietorship or as a corporation. If you have set up as a corporation, you have some options for your remuneration. You can pay yourself with a salary, with dividends, or with a combination of the two. Note that the U.S. IRS requires you to have a minimum pay. Dividends may be advantageous from a taxation point of view, but salary will force you to build some retirement funds, as you will pay some S.S. contributions. If you have trouble saving, it’s not a bad thing.

7- Allocating savings for retirement: Unfortunately, entrepreneurs are neglecting to save for retirement. According to a 2017 survey (Manta, 1960 respondents):

  • 34% of entrepreneurs don’t currently have any retirement savings plan,
  • 12% say they have no plans to retire.

That’s alarming. And at some point, even if you feel full of energy now and believe you can work forever, you will start feeling tired and want to slow down. At that time, it will be too late to get the compounding effect of 10-15% savings from your income to tax-protected retirement plans or to take the salary and contribute to your social security. So start early, schedule automatic contributions to a retirement plan, and allocate savings for retirement in that friendly budgeting app you use!

8- Choosing your retirement savings plan: We listed below several informative articles on the type of savings plans to choose from. Whether you are in Canada or the USA, a lot of those options offer tax benefits. They are often tax-sheltered accounts (RRSP), which means that you can deduct contributions from your taxes, or not be taxed on growth (TFSA), etc. You may only pay income tax when you withdraw the funds. The premise is that your tax bracket will be lower at that time than at the time of contribution.

9- Understanding the tax impact at times of withdrawals: I wish financial advisors would alert you on the importance of planning these withdrawals a few years before you retire. If you have $250,000 in a tax-sheltered account, and you want to buy your retirement home with that money, the tax impact of withdrawing the whole amount in one tax year is not going to look pretty!

10- Understanding your exit strategy: When it is time to sell or shut down your corporation, make sure to get the advice of a financial advisor or an accountant. You may elect to issue dividends or record capital gains or a combination, and the tax impact of each option is different.

11- The illusion of passive income: As an online marketer, I am convinced that you heard that one too. You may even have read “The 4-hour workweek.” The Fizzle article mentioned above also mentions the great feeling of waking up to the sound of the cash register and that income that came in while you were sleeping. Of course, you can develop online courses and products, or get affiliate marketing income, but they are hard work. It will take you hundreds of hours to create them, and hundreds of more hours to promote them. And sales won’t come in forever. You’ll have to update them to keep them current and continue to have a presence online to stay visible. So the whole concept of “passive income” is a bit misleading.

12- Understanding how long you want to work: I mentioned it above. It seems unrealistic to believe that you’ll have the energy to work full-time forever. Trust me; you won’t! Even though you cannot foresee how healthy you will be in 20 years, giving it some thought is valuable. Why not assume that you will work full time until 62 and then part-time until 67-70? It seems like a more realistic assumption than believing that you will never retire or that you’ll work 60-70 hours a week until you reach 70. You can read more on the impact of those options on your retirement income in this article: “Here’s how much more money you’d have if you delayed retirement until 70, according to Stanford researchers.”

13- The dangers of planning for retirement as a couple: This seems a bit off-topic, but I could not omit to mention it, as planning your retirement as a couple might have the largest impact of all the retirement decisions discussed above. The reality is that if you made decisions on salary, retirement plans, real estate investments, living expenses estimates at retirement, etc. based on being a couple and then divorce, you will be up for a brutal awakening. Financial advisors won’t mention it, but I strongly recommend that you plan for retirement as if you were single. Being a couple when you retire will simply be a bonus, financially!

Final thoughts: Get financial advice

When I look back and see the mistakes I made, I wish I had found a trustworthy financial advisor to guide me along the way. It is not an easy thing to find, however. If they make their money on the retirement plans they sell you, they may not always give you the best advice. A financial advisor who sells mutual funds will not recommend that you invest in fixed-income options or real estate, for instance, even if these could be your best choices. Hire a knowledgeable accountant and a tax expert, find an unbiased financial advisor, and read a lot: these would be my recommendations!

Further readings:

  1. A freelancer’s guide to saving for retirement (March 2020)
    • About a third of full-time freelancers aren’t saving for retirement at all, and 70% say they’re unprepared to maintain their current lifestyle in retirement, according to a Betterment study.
    • Discusses IRA and contributing regularly; freelancers don’t have access to 401K (i.e., she is talking about self-employed, not corporations)
  2. Planning for Retirement as a Freelancer
    • Discusses rate of return vs. inflation; saving 10-15% of income; retirement calculator; saving annual income x 25; 401K, IRA, “target retirement” style fund (Vanguard: adjusted risk as you get closer to retirement)
  3. Retirement Calculator – Calculate your retirement savings and more
  4. Retirement Calculator
  5. Saving For Retirement Can Seem Impossible As A Freelancer — Here’s How To Do It (November 2018)
    • 56.7 million freelancers are working in the U.S. today. In recent years, the gig economy has mushroomed to represent roughly 35% of Americans — and rising.
  6. A Quick and Dirty Guide for Freelancers Who Need to Start Saving for Retirement (Like, Now) (October 2019)
    • Understanding options that freelancers have
  7. Self-employed? Here’s why your retirement savings are falling short (September 2019)
    • Only 13% of freelancers in single-person firms are participating in a retirement plan
    • Entrepreneurs may be able to claim a tax credit for the cost of setting up a plan at work.
  8. Financial Planning for Small Business Owners
    • They may see the business as the only retirement plan necessary – as a source of capital that will fund their retirement needs.
  9. Stages of Retirement Planning For Entrepreneurs (June 2019, Moss)
    • Three stages of retirement and what to do at each stage
    • Many assume that the profits from selling their business will be enough to carry them through retirement, but that’s not always the case.
  10. You Will Thank Us Later – 5 Tips to Create a Retirement Plan for Entrepreneurs (January 2019)
    • Manta survey (2017, 1960 respondents) suggests that 34% of entrepreneurs don’t currently have any retirement savings plan.
    • Around 18% of entrepreneurs plan to sell their business to fund their retirement.
    • 12% of entrepreneurs say they have no plans to retire.
    • Entrepreneurs assume that Social Security will cover their needs, even though it’s rarely enough to survive on.
    • Four tips: Know your options; slow and steady wins (power of compound interest); create a budget; diversify; keep your hands off;
  11. Survey: 34% of entrepreneurs lack retirement savings plan (July 2017)
    • Results of the Manta survey
  12. How these Canadian entrepreneurs are saving for retirement (April 2019)

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