I thought that becoming self-employed would be a dream come true. However, six years after I made the move, I’m beginning to realize that while fulfilling in some ways, it’s be a lot tougher than I thought in others.
One way that self-employment has not been to kind to me is when it comes to my retirement future. I think my current self-employment dream is slowly killing my retirement future, but I’m taking steps to reduce the impacts of my current employment role.
Retirement plan funding
When I became self-employed, I lost my employer-sponsored retirement plan, which matched my 5 percent contribution with about another 3 percent. I was left on my own to plan for retirement with a much reduced income.
However, I realized that there was power in numbers, even if those numbers were relatively small compared to what they had been. And those smaller numbers paired with time could eventually lead to large numbers.
This is why I began my own retirement contribution plan. While it is only $50 a week, paired with a matching amount from my wife, we contribute about $100 a week or $5,200 a year. While it’s not a huge amount, if we continue this contribution amount at a 5.5 percent return compounded annually over the next 30 years, we could be looking at a total of nearly $400,000, which is certainly better than nothing at all.
However, self-employment can hit hard in other ways too, ways that can significantly impact a retirement future. A reduction in benefits due to leaving a regular employer can certainly impact retirement plan funding and of course an employment-sponsored healthcare plan. However, there are other benefit areas that can hit finances hard as well.
Having to foot the employer side of employment taxes is just one such benefit that might not at first be recognized. Not only do I have to pay my share of things like Social Security and Medicare taxes, but I have the equally costly employer side to cover not too. That means that about 13 percent of every dollar I earn is going just toward these taxes, and that doesn’t even account for state and federal income taxes. So while others pay half as much in such taxes, yet reap the same reward, I end up paying double, which not only costs me more now, but leaves me less money to invest in other retirement savings plans.
Longer working timeframe
I enjoy my work, so I don’t mind the thought of working longer; however, in the self-employment role, while a longer working timeframe can mean continued income, it can also increase work-related costs.
Continued higher taxes, and expenses related to office supplies, inventory, and similar work-related costs can also remain, which puts an additional strain on income requirements. And of course there is the ever-present possibility of loss of work, which could reduce income at a time in life when it could be needed most.
So while self-employment is freeing in many ways, it could be leading to the demise of any semblance of what might currently be considered a “normal” retirement for me.
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The author is not a licensed financial or career professional. This article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.