Self-employed workers face greater retirement challenges
The self-employed have received more press in the past few years as the number of contractors, freelancers and small business owners has ballooned. And while many people are setting out on their own, they haven’t put much thought into how they will save or prepare for retirement.
A study entitled “Retirement Preparations in a New Age of Self-Employment,” sponsored by the Transamerica Center for Retirement Studies in collaboration with Aegon Center for Longevity and Retirement, surveyed 1,600 people across 15 countries, including the U.S., Australia, Canada, the U.K. and Japan.
It found that many of the self-employed expect to retire after the age of 65 — or never. More than two-thirds of both global and U.S. respondents “envision a flexible transition to retirement,” the study found. Nearly one third expect to work part-time or work temporary contracts before they fully retire, while 23% globally said they will keep working as they currently do and retirement age won’t make a difference.
Of those surveyed who said they envision a flexible transition to retirement, 63% said they want to continue working longer to keep their brain active and 51% said they enjoy their work or career.
“Self-employment seems to be on the rise, not just in the U.S. but globally,” says Catherine Collinson, president of the Transamerica Institute and Transamerica Center for Retirement Studies and executive director of the Aegon Center for Longevity and Retirement.
“There are more and more opportunities for self-employment through digital marketplaces and, at the same time, employers are going to contract workers or rethinking their workforce management, and yet, not a whole lot of attention is paid to how the self-employed should prepare for retirement,” she says.
The self-employed have earnings challenges that are different from typical workers because they make irregular incomes, says Collinson. This can complicate planning for the future.
“Some weeks and some months and some years are better than others. Hopefully there are boom years, but there are also likely to be lean years,” she says. “That adds an element of complexity to saving consistently over time.”
Collinson sees the same trend with low-income workers or workers who don’t have access to retirement accounts through their workplace.
“Time and time again, studies have shown that having access to a benefit in the workplace is a big driver of savings rates. In that regard, the self-employed are similar to those workers who are not offered retirement plans, which ultimately means they are kind of on their own. It is a do-it-yourself, roll up your sleeves and do your homework [way], and figure out a way to do it that is best for you,” she says.
Thirty-three percent of those surveyed globally said they are relying on government benefits, like Social Security, for their retirement savings. In the U.S., that number is 48%.
“That is a big reminder to the self-employed,” she says. Some accountants encourage workers to keep their reported income as low as possible to reduce their tax liability, but they must understand that could negatively impact their future Social Security benefits.
“Paying into Social Security is really important and that will be for many an important source of income when they retire. It would be really bad to wake up at age 67 and realize there wasn’t a benefit or the benefit coming was smaller than expected because you didn’t pay into the system,” she says.
The IRA option menu
There are other retirement savings vehicles available to the self-employed, including a traditional IRA, SEP or SIMPLE IRAs. There are also Solo 401(k) plans and the government’s myRA program that was launched by former President Obama at the end of 2015.
The myRA is a starter retirement savings account that invests in guaranteed rate Treasuries. There is no minimum balance requirement on the myRA, so anyone can contribute. Once the myRA account reaches $15,000, it must be rolled over into a full-blown IRA offered by the private sector.
“It’s a good opportunity for people to get started saving,” Collinson says. “By building up savings of $15,000, they are building capital and local banks and credit unions are more interested in servicing their accounts.”
The self-employed are more likely than employed workers to list stocks, investment property or business assets as a source of retirement income, the survey found.
One thing the self-employed should look into as tax season approaches is the Saver’s Credit, which rewards people for putting money away into retirement savings, like a 401(k), 403(b) or IRA. To qualify for a credit worth 50% of your 2016 savings contribution, an individual needed to earn less than $18,500 and a married couple, filing jointly, could have an adjusted gross income of not more than $37,000. Individuals could make as much as $30,750 and a married couple could make as much as $61,500 to earn a 10% credit on their contribution.