Why Self-Employment Can Sabotage Your Retirement

Why Self-Employment Can Sabotage Your Retirement

This post originally appeared on MainStreet.

Being your own boss means maintaining independence, developing your own vision of success and profiting from your passion. It can also mean neglecting your individual retirement planning.

TD Ameritrade has fielded a new survey and finds that nearly 70% of entrepreneurs, contractors and other self-employed Americans often are not saving for retirement on a regular basis – if at all.


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Fully 40% of the self-employed aren't saving regularly, and 28% currently aren't saving at all. That's drastically more than the number of traditionally employed people who do not save regularly (12%) or at all (10%). To boot, nearly a third of young entrepreneurs aren't saving for retirement: 29% of Generation X and 32% of Gen Y.

Launching your own startup is a growing trend. More than 10 million Americans are self-employed, an increase of more than 14% since 2001.

"For entrepreneurs there needs to be a balance between investing in the business today and investing in their future financial well-being," said Lule Demmissie, managing director of retirement at TD Ameritrade. "When you're self-employed the temptation is to think that the business will grow enough that you won't need to save today. But, you don't know when the next payout is coming, and you also don't want to forfeit the power of tax-free compounded growth in vehicles like an IRA. Having a retirement plan in place with regular saving is doubly important."

The biggest challenge in being your own boss is an unpredictable income, according to 61% of survey respondents. But affording good health coverage (33%) and saving for retirement to the extent that they want to (31%) are also common difficulties.

"There are two important reasons why self-employed people should set up automatic savings, even if they only have a small amount to contribute regularly," says Demmissie. "First, you never know if you'll have a windfall every year, and you don't want to waste the tax-free growth opportunity that an IRA provides. Second, we've seen correlations between people who get in the habit of automating their investing and arriving in retirement financially prepared. Contributing small amounts regularly is often more fruitful than investing larger sums later on."

It seems the self employed are up to the challenges. Fewer than one in ten said they hope to switch to traditional employment in the future. Many decided to start their own business, because they wanted more freedom (57%), to be the boss (46%) and to work in something they were passionate about (39%). A quarter of Gen Y became self-employed, because they didn't like, or didn't expect to like, traditional employment, and a fifth of Baby Boomers became their own boss because they lost their jobs.

Most entrepreneurs are stashing their savings in traditional savings accounts or money market accounts (47%), followed by traditional IRAs (33%), Roth IRAs (32%), and SEP IRAs (13%). Less than half (44%) of the self-employed are aware of individual 401(k)s.

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