Why is it now so important to talk about retirement planning for workers without an employer-sponsored plan?
Only about half of all Americans have access to plans available through their job, according to a 2018 report from the Stanford Center on Longevity. The other half are freelancers or workers with multiple jobs or part-time jobs that do not offer 401(k)s or other accounts. And the percentage of people in this position is projected to grow in the coming years! But not having access to an employer-sponsored plan does not mean you can skip saving for retirement, Tom! This morning, I want to talk about the options available to those without an employer retirement option.
Let’s start with the basics. What percentage of our paycheck should we be saving?
Regardless of whether you have an employer sponsored plan or not, you want to try to save at least 10% of your gross income, which means your income before taxes. For example, if your salary is $36,000 per year, you should try to put $3,600 ($300 per month) into your retirement account every year. If you cannot save 10%, that’s OK. Every dollar counts, so save whatever you can! And remember, contributions to most retirement funds are considered pre-tax, meaning that what you save is deducted from your overall taxable income. So come tax time, you will be paying taxes on a smaller adjusted income.
So we are socking away 10% of our pay. Where to we put it if we are self-employed or freelancing?
There are a number of vehicles available if your employer does not offer a plan. The first is the Single 401(k), also known as the Individual 401(k) or Solo 401(k). These accounts are set up for individuals or a small business owned by a spouse or an immediate family member. They work just like a traditional 401(k), with one major exception. Because Single 401(k) participants don’t have access to employer matching, account holders are allowed to make higher contributions up to 25 percent of the business’ earnings.
If you are a small business, a Simplified Employee Pension IRA or SEP IRA is also a good option available to you, especially if you have employees. SEP IRAs are easy to set up and have low fees. However, under this account, the employer makes contributions, not the employees.
There is no minimum contribution for a Single 401(k) or a SEP IRA, allowing you to put away money at any time!
What options are available for part-time workers or those who work at a company that doesn’t offer a retirement plan?
Great question! If you have a couple of side hustles or your company does not offer retirement accounts, you can put your money in an independent retirement account, or IRA. Contributions you make to IRAs are usually tax-deductible, and transactions and earnings within the IRA have no tax impact. However, it is important to note that withdrawals you make in retirement will be taxed as income. An IRA allows you to save if you haven’t struck out on your own!
Is there anything else our listeners should know?
When you do not have an employer-sponsored plan, it can be easy to put retirement on the back burner. Don’t let this happen to you! Take time to do your research, choose the investment vehicle that best suits your needs, and get started. As you have heard me say, the best way to contribute to your retirement account is to set up a direct deposit so you can set it and forget it.
And remember, if you do not know where to start, contact a financial advisor.
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