Retirement Planning Tip for the Self-Employed: Don’t Make My Mistake

Some of the links in this post are from our sponsors. Read our disclosure to see how we make money.

Retirement planning when you're self-employed is very important. I share some of the more common retirement planning tips you can use to grow your wealth.

I have a confession to make. Last year we did very little in terms of saving for retirement. I’ve spoken on numerous occasions about retirement planning tips, but fell short last year.

When I look back at our retirement saving efforts over the last year, there is one area in particular that I have regrets about (other than not setting aside more, of course 🙂 ). We saved money throughout the year and put it in a savings account, but we were not actively putting it in the stock market like we should. I’m sure there are multiple reasons behind it, but ultimately it all points back to fear in relation to being self-employed and what business would look like six months down the road.

We needed to keep our money liquid (or at least it felt that way) and looking back, I realize that played into our decisions and actions regarding retirement saving. That said, I’m committed to doing things differently now that we’re in 2014 and taking action on some of the retirement planning tips I’ve promoted for some time.

My Retirement Planning Tip – Don’t Wait!


Saving for retirement, and really investing altogether really does come down to time, which is why I think it’s so important to start investing with little money, regardless of the amount as you do not want to allow time to pass you by out of fear that what you’re investing too little.

This is huge when you’re self-employed. Not only are you missing out on a possible 401k match through a traditional employer but your time is also tied up dealing with other things related to running your own business. That latter point is what I tripped up on this past year and what I’m going to be avoiding this year with our retirement planning.

Going back to the issue of losing out on the 401k, being self-employed also means that you need to be saving more money for retirement, not less. No brainer I know, but still an incredibly important retirement tip not to overlook. The simple fact is that the employer match is one of the best benefits to be had and you’re missing out on that when you’re self-employed.

In light of that, you need to be double timing your retirement saving so you can make significant progress and putting money into a savings account throughout the year is simply not enough. If you’re doing that to build up your emergency fund that is one thing, but in terms of retirement planning you’re essentially losing money due to inflation.

What are Your Retirement Options if You’re Self-Employed


Since you don’t have a nice 401k to opt in to when you’re self-employed that means you need to be looking for other retirement planning options. There are a few main options to consider, and if you’re looking for specific retirement planning tips I encourage you to speak with a tax advisor as I’m not one and you want professional advice when determining what is right for your specific situation.

That said, much of the information I’ve included below is from the IRS website.

SEP IRA: The SEP IRA is likely the most popular option that many self-employed individuals look at when saving for retirement. This is the option my wife and I went with and I’ll get into a little more later as to why. The SEP allows you to contribute up to 25% of your net earnings – or up to $51,000 for 2013 (and $52,000 for 2014). The SEP is good if you’re a one person business, or in our case two person business.

A SEP operates like a Traditional IRA in that the contributions are tax deductible in the year you make them. The benefit of SEPs is the amount you can contribute and flexibility you have with them, but the downside is if you add employees in the future as you’re legally required to make the same contribution for all your non-contract workers.

Solo 401k: The Solo 401k is also another solid retirement planning option to look at if you’re self-employed. You can contribute up to $17,500 for 2013 and 2014 (plus a catch up of $5,500 if you’re over 50). In addition to this contribution you can also put in an additional 25% of your net earnings – with it being the same amounts as those for the SEP.

The main benefit of the Solo 401k is that you can contribute even more than the SEP and also have the ability to take out a loan on it if you need, though I’d try to avoid that latter option. The drawbacks are that many online brokerages charge some sort of set-up fee in the realm of $100-$250 annually and only you and your spouse can contribute.

SIMPLE IRA: The final main retirement option for self-employed individuals is the SIMPLE IRA. This retirement option is specifically for business that have a couple of employees under their umbrella. You can contribute up to $12,000 for 2013 and 2014 (and an additional $2,500 if you’re 50 or over).

The benefits of the SIMPLE is they’re fairly easy to set up and they are very flexible. The main drawback is that accounts must be opened by October 1 of each year as well as a lower contribution limit than that of the SEP IRA and Solo 401k.

So, as you can see there are several options to look at when you’re saving for retirement while being self-employed, with the SEP and Solo 401k being the most common. That said, there are other options out there, but these are generally the most common retirement saving vehicles for someone that is self-employed. The nice thing is that most online brokerages offer all of these accounts and should be fairly straightforward to set up.

What We Chose


Now that I’ve bored you to death with my retirement planning tip I’ll let you in on what we went for. 🙂 Mrs. Frugal Rules and I both opened SEP IRA accounts with my favorite brokerage Scottrade as it really came down to the SEP IRA vs. Solo 401k for us. We opened our respective SEPs at the end of the 2013 year and funded both accounts as well as funding our Roth IRA accounts. We do a majority of our investing with Scottrade as we like their service, their commission is very reasonable and they have a local branch office that we can visit any time we need to speak with someone in person.

That said, I don’t want to gloss over the importance of retirement planning when you’re self-employed. It is incredibly important, as you’re losing out on any match, and must be taken seriously. I’ve spoken with self-employed individuals in the past who did not take it seriously and, as a result, were in their 50s and 60s with nothing to speak of in terms of retirement investments.

What I’ve committed myself to doing this year and beyond is to view our retirement planning as a monthly bill to our future selves. We’ve set up direct deposits into our respective accounts on a monthly basis and will be investing those deposits in the market, largely in low cost index funds.

Assuming we have better months down the road, we will also set aside overages in our SEP IRAs to maximize what we’re putting into the market. We have also opened a free account with Personal Capital so we can watch over our entire portfolio as well as to find ways to mitigate investment fees.

Retirement planning when you're self-employed is very important. I share some of the more common retirement planning tips you can use to grow your wealth.

As we were already putting the money aside throughout the year in our savings account this should not be a real sacrifice, but I find it’s the mental aspect of making our money grow rather than just sit that’s important to maintain. Ultimately, I believe that’s the best way to invest – managing the mental aspect of investing so you can stay committed to your plan when emotions or situations try to interject themselves.

Like I said in the beginning, and have said prior, time is incredibly important when it comes to investing in the stock market and exponentially more so when you’re saving for retirement. If you’re self-employed, please don’t make the mistake of waiting, but start now with whatever you have.

Additionally, if you’re seeking out help with retirement planning tips specific to your business and tax situation please find a qualified tax professional to help you wade through the deep and complex waters of self-employment and saving for retirement.


What is something you’re going to do different this year when it comes to saving for retirement? Do you view investing in the stock market as a bill to yourself?


The following two tabs change content below.

John is the founder of Frugal Rules, a dad, husband and veteran of the financial services industry whose writing has been featured in Forbes, CNBC, Yahoo Finance and more.

Passionate about helping people learn from his mistakes, John shares financial tools and tips to help you enjoy the freedom that comes from living frugally. One of his favorite tools is Personal Capital , which he used to plan for retirement and keep track of his finances in less than 15 minutes each month.

Another one of John's passions is helping people save $80 per month by axing their expensive cable subscriptions and replacing them with more affordable ones, like Hulu with Live TV.

Latest posts by John Schmoll (see all)


  • Matt Becker says:

    I definitely understand the desire to keep your cash liquid as you first start out on your own. You really don’t know what’s going to happen. It’s very easy to look back on what DID happen and think you should have done things differently, especially when the stock market shoots up like it did, but that doesn’t mean you made the wrong decision. A decision is good or bad at the time of the decision, not based on what happened afterwards. In other words, don’t beat yourself up over things.

    On another note, we’re going with a Solo 401k for my wife. It’s pretty easy to set up with Vanguard and pretty low-maintenance, and I think the contribution flexibility is nice.

    • John says:

      Yea, I agree we didn’t know what was going to happen during the year. The kicker is that we had more than enough cash on hand throughout the year and it largely boiled down to emotion. Then, you look at what the market did last year and I’m kicking myself. But, that’s water under the bridge.

      Sounds good on the Solo 401k. If that makes the best sense, then it’s quite nice in terms of the contribution.

  • Dee @ Color Me Frugal says:

    You make a great point about the fact that people who are self-employed have even more need to save for retirement because of the lack of employer match. My hubby and I both currently have jobs and employer matches in our 401(k)s, but at some point in the future we may be making a switch to self-employment for at least one of us, so will have to spend more time thinking about this. Thanks for the breakdown of the different options- I knew of SEPs but had not previously known much about the other two.

  • MMD @ My Money Design says:

    You didn’t bore us with these retirement options! πŸ™‚ In fact I’ve been researching the same thing to help my sister with her freelance business. Remarkably by doing so I found out that people like me who are employed but run a side business can also contribute to a SEP IRA. I’m going to be researching that strategy a lot more!

    • John says:

      Glad to hear MMD. πŸ™‚ Yes, I do believe you’re correct with that. With how much you can contribute, it’s a great option to have.

  • DC @ Young Adult Money says:

    This year I plan on opening an IRA and contributing to it in addition to my 401k. One thing I like about being employed is how the benefits are all laid out for you and you have to do VERY little homework to get set up and start taking advantage of everything.

  • JC @ Passive-Income-Pursuit says:

    I don’t think building cash reserves when you’re self-employed is the worst thing though. At least you weren’t out there just spending it willy-nilly. The SEP is a good choice because you can catch up quickly if you’re earning a solid income from your business. $52,000, each. That’s $104,000 per year. Of course that requires over $400k in net earnings. That’s a good point though about making sure you save double time if you’re self-employed. You no longer have that match which is a real bonus. Counting that I made an extra $7,200 in contributions for 2013.

    As far as changes to retirement saving, there won’t be much other than allocations. The 401k is going to stay at just enough to get the full match and then I’ll just keep saving/investing as much after-tax income that I can.

    • John says:

      Very true JC! It can definitely be a hard balance to maintain. Nice work on the extra $7,200, that’s not bad at all. πŸ™‚

  • Liz says:

    As far as retirement goes, I don’t think I will be doing anything different this year. I have an automatic contribution set up from my paycheck and I don’t think I will increase my contribution % simply because we are focused on student loan repayment this year. I did start a new job about two months ago and this employer has a pretty nice match at 6% so I’m excited about that! We’ll see how the year goes.

  • Jon @MoneySmartGuides says:

    My wife and I actually keep a larger than needed pile of cash on hand in our emergency fund. It’s more than I would like, but it allows her to sleep at night. At the end of the day, I’m OK with this as we put as much as we can into non-taxable and taxable investing accounts. When it comes to my retirement, I decided to go the solo 401k route. It made more sense in my situation.

    • John says:

      I think that’s what so much of it comes down to, that peace of mind. The Solo 401k is definitely a good option if it fits for you – you can contribute even more. πŸ™‚

  • Laurie @thefrugalfarmer says:

    I can totally understand you wanting to keep your cash liquid, John. It’s scary to lock it away in investments when you’re 100% responsible for your family’s well-being, not secured by an employer. That being said, I think it’s awesome you guys are kicking it up retirement-wise this year. We are not probably contributing as much as we should, but I’m just kind of feeling like the debt has to be the priority right now.

  • Holly@ClubThrifty says:

    As a self-employed person, I use a SEP IRA through Vanguard. I also have a ROTH IRA. Since we’re a two-person LLC, we can only contribute 20% of my net profits, which is still a lot. In 2013, I put 10K in the SEP and 5K in my ROTH IRA. My biggest retirement problem is not investing every month and investing in huge chunks instead. I need to stop doing that!!!

  • Brian @ Luke1428 says:

    We aren’t doing anything differently this year…just keep chugging away at it for the long haul. I’m really pleased we are getting a match at my wife’s work. That makes retirement investing all the more enjoyable.

  • Travis @Debtchronicles says:

    Every article I read about retirement reminds me that once we finish our debt management program in February that we have some catchup to do with our retirement goals. Thanks for the reminder John…and good luck on really getting back on it in 2014!

  • Kim@Eyesonthedollar says:

    I don’t think it was bad at all to build savings. We have way too much in cash right now as well because I’m not sure how this next year will go. On paper it looks great, but you never know when you have some big changes in your work situation. One thing about selling my business is that I can’t contribute to the retirement plan there anymore, so I am in the process of setting up a solo 401K with Vanguard. I am going to start contributing monthly to max out the $17.5K part and we’ll see if I can add more later on. I can see how it would be easy to slack and not put anything in since it’s up to you to actually set everything up instead of an employer.

    • John says:

      That’s awesome Kim, especially being able to know you can put in so much now. It can be very easy to slack on it, but that has to be watched very closely.

  • Grayson @ Debt Roundup says:

    I can understand the want to have liquid cash on hand. When you are self-employed, you need to be flexible. I am not sure how I would handle it. It is a much harder decision than someone like myself who has a full-time job.

  • My Wealth Desire says:

    As soon as we pay off our major mortgage this year, we can start saving more for our retirement. I want to expand our farming venture and mini groceries business in order to bring home some income. It helps us to save for retirement and for emergency funds as well.

  • Tonya@Budget and the Beach says:

    Great info John! This is one area I felt short on when I started freelancing, mainly because I was in survival mode, which is why I strongly advocate for people to REALLY plan ahead before making the leap. I miss my 401k matching! πŸ™ I do a ROTH IRA, but was planning on a SEP this year. I still want to contribute more than I have been…

    • John says:

      Thanks Tonya and I could not agree more. We’re in the same boat, but thankfully things are looking up so we should be able to contribute more fairly easily.

  • Raquel@Practical Cents says:

    We’re focusing on debt repayment and building a healthier emergency fund. However, if we can really stretch our dollars we will be making larger contributions for our retirement accounts.

  • Shannon @ Financially Blonde says:

    I actually think that you are just fine. I would rather see clients have more cash and not get into credit or other financial distress than focus on retirement. For anyone under 40, we are looking at retirement around 75, so retirement planning is a marathon not a sprint. As long as you are making smart choices along the way (like building your life savings, etc) then you will get there. That being said, I agree with your SEP IRA choice, I think you have the best tax treatment for that plan and as you mentioned it is not available for everyone.

    • John says:

      That is a good point Shannon. I just hate looking at what the market did last year and knowing we could have taken greater advantage of it.

  • Mackenzie says:

    Even though we are not self-employed, your post reminds me that we need to plan more for our retirement besides our 401k’s. Thanks for the reminder πŸ™‚

  • Michelle says:

    We definitely have a good amount of liquid cash on hand right now since I left my day job for self-employment. That is important to us so that we don’t have to freak out if we have a bad month. We also have SEPs.

  • Shannon @ The Heavy Purse says:

    Excellent post, John. Self-employments offers a host of great perks but the one important thing you ldo ose is the employer match … and I would also say at least a subtle push to save for retirement. With the ins and outs of running a business, especially that first year or two, retirement can take a backseat and sometimes remain forgotten even after the business is more established. I can’t blame you for wanting to keep a fair amount of money liquid initially. I’m sure it gave you and Nicole peace of mind and allowed you to work and grow your business, rather than worry about making ends meet. Now you’re in the position where you can get aggressive with your retirement savings, which is a great place to be in!

    • John says:

      Thanks Shannon! Yes, it can take a backseat and I’ve spoken to many that allowed it to go on for years and am committed to it not being us as well. I am very thankful to have the ability to be in the position to be more aggressive with it, it’s a good problem to have. πŸ™‚

  • Daniel says:

    My wife and I have individual 401(k)s through vanguard. The process was pretty simple to set up, but I did a ton of research before submitting any paperwork to determine exactly what was best for our situation.

    I think I keep too much liquid and then invest it all at once, if only because having side income is hard to automate. While it has been pretty steady the last few years, I have no illusions that it will remain that way.

    • John says:

      Glad you were able to get it set up with little in terms of headaches. Speaking from someone who saw them set up all the time, I know that’s not always the easiest.

      I’m the same way when it comes to having a bit too much liquidity, though I’d rather have that than not enough. πŸ˜‰

  • anna says:

    Being able to top off my retirement account through work is a high priority for me this year (and many years to come) – I sadly never realized it could be a reality, as well as that there’s additional options in being able to save/invest for retirement. Thanks for the info, John! πŸ™‚

  • Brick By Brick Investing | Marvin says:

    I really needed this John! In 5 years I will hopefully be working for myself and I always wondered what I would do for my 401k.

    • John says:

      Hey Marvin! Yea, it sucks BIG TIME to lose the match, but there are some solid options out there and if you’re making enough, you can contribute a nice little chunk of money each year.

  • Prudence Debtfree says:

    My husband has been self-employed for the last 5 years after his career was cut short by a massive hi-tech bust in our city. (That could be taken the wrong way, but you know what I mean : ) We’ve been following Ramsey’s debt-reduction steps for a year and a half, and we’re in the middle of paying off his huge business debt. He hasn’t been saving for retirement at all. Your article makes us very keen to kill off the second half of his business debt so that he will be free to make significant investments in saving for retirement.

    • John says:

      Sorry to hear that, but it sounds like you made the right move to kill that debt. I can understand the feeling of wanting to get that paid off, especially to get it behind you.

  • Daisy @ Prairie Eco Thrifter says:

    My fiance, when he was self employed, did NO retirement planning. He didn’t contribute any money to a retirement account, didn’t even think about it. It drove me nuts! Luckily, now that he’s no longer self employed, he is back on track.

    • John says:

      I can understand it driving you nuts, I spoke with way too many people who did the same thing and it only sets them behind. Glad to hear that he’s back on track. πŸ™‚

  • John@MoneyPrinciple says:

    I am really not sure that planning for retirement too early is a good idea. You need to invest in yourself both educational and experiences when you are young. This will pay dividends in both a more interesting life but also career opportunities which can open and is particularly true for the portfolio careers of the future. The time to invest is when you have lots of disposable incime in your middle years. And while we have things like IRAs and Roth IRAs and 401(k) in the UK, they are often a trap into which you pay money but then find that you need it and can’t get it out. Perhaps the situation is a bit different in the US.

    • John says:

      I’m a firm believer in those as well, but why not balance investing in with them? Time is likely the best tool for your investing and if you put it off too long then it’ll likely be to your detriment. We’re able to take money out of retirement accounts, but it is very likely that’ll result in a taxable event given the right circumstance.

Leave a Reply

Your email address will not be published. Required fields are marked *