Mike Dawson, 54, a lobsterman in Maine, started saving for retirement in his mid-to-late 20s with an individual retirement account. In good years, he puts aside additional savings separately to supplement the amount he can sock away each year in an IRA.
“I save better than I invest,” said Dawson, who learned the discipline of saving for retirement from his father, who was also self-employed.
Dawson figures he has about 10 more years until retirement—when his body wears out from the rigors of lobster fishing and when his pool of retirement savings and investments will be enough.
“You have to be somewhat disciplined doing it on your own,” Dawson said. “I grew up that way. I’ve taught my kids to save early. You just have to start early and you’ll have so much more than if you start at 45 and hope to retire ever. You’ll be a lot better off starting young.”
Still, Dawson said financing a retirement on your own—without a big company matching contributions—can be difficult. He puts money into an IRA once a year when he pays his taxes.
“I think I need twice as much as I have now. I don’t want to retire too early and not have enough and make a mistake. But if you wait too long, you die before you can do anything, to be blunt,” Dawson said.
For employees of small companies without retirement plans or those who are self-employed and gig economy workers who are their own bosses, retirement planning falls on their shoulders.
Only 60% of American workers have access to employer-sponsored defined-contribution plans, according to the U.S. Bureau of Labor Statistics, and only 43% were active participants.
Meanwhile, the American Retirement Association found that more than 5 million employers in the U.S. do not offer a workplace retirement savings benefit plan, leaving 28 million full-time and about 23 million part-time workers without that way to save.
There are, however, other options to save for retirement. It just takes a little extra effort.
“There is a component of some additional legwork in establishing or maintaining a plan. It’s a little more complex than just clicking a button when you’re at a large employer. But there are options available that will allow them to save for retirement,” said Roger Morrissette, head of small business retirement products at Fidelity. “Start early. Automate contributions. Consistency is key.”
“The headwinds are really not that strong,” said Nilay Gandhi, senior wealth adviser with Vanguard. “It’s doable.”
Whatever you do, start now.
“The sooner you start, the better. It’s time in the market, not timing,” said Drew Oestreicher, senior client adviser and senior vice president of Spinnaker Trust.
Set up automatic withdrawals from your bank account into whichever retirement plan you choose.
“Set it up and make it easy to contribute. Keep that discipline rolling. Automatic contributions strip the emotion out of it. Forced savings is important because if you don’t see it, you won’t spend it,” Oestreicher said.
“Make sure you are paying yourself first. There are factors that are competing for contributions, whether it’s rent or utilities or food or having some fun. That’s why it’s important to have a budget, especially when there’s the potential for uneven cash flow when you’re self-employed or starting a business. It’s important to know what’s coming in and out,” Gandhi said.
People who work for small companies that don’t provide benefits, or who are self-employed or work part time may earn less than full-time workers at larger companies. As a result, there are even more pressures on the finite amounts of money coming in each month and saving for retirement can be challenging.
The average gig worker in the United States makes $69,000 per year—higher than the median U.S. income of $59,000, according to a report by MBO Partners. But gig workers still must pay for their own healthcare insurance and other costs out of those funds, while full-time workers at large companies are more likely to have benefits paid partially by their employer.
The SECURE (Setting Every Community Up for Retirement Enhancement) Act, passed in 2019, may improve retirement savings rates. The act expanded retirement plan access to many part-time employees, allowed small businesses to set up more affordable plans, and changed rules related to IRAs and employer-sponsored plans.
Some states, such as Washington and New Mexico, are tackling retirement savings efforts on their own, using approaches such as retirement marketplaces, in which employers and individuals can purchase a savings plan through different state-approved providers. Meanwhile, Massachusetts and Vermont have multiple employer plans, in which unrelated businesses may jointly sponsor a 401(k) plan.
Several other states, from California to New Jersey to Maine, offer payroll deduction individual retirement accounts that allow employers to automatically deduct a portion of pay from an employee’s paycheck and deposit it into the employee’s own IRA.
Here are options for retirement accounts.
An IRA allows individuals to invest pretax income up to $6,000 for 2022. For those over 50 years old, an additional $1,000 can be invested. No capital gains or dividend income taxes are assessed until the beneficiary makes a withdrawal.
This is a tax-advantaged IRA in which you contribute after-tax money. Since you’ve paid taxes on the money going into the account, the withdrawals are tax-free after age 59½, assuming the account has been open for at least five years.
Health savings accounts:
While this is not a retirement account, it can help with investing and planning for expenses, Oestreicher said.
An HSA lets you set aside money on a pretax basis to pay for certain medical expenses. By using untaxed dollars in a HSA to pay for items such as deductibles, copayments and coinsurance, you may be able to lower your overall healthcare costs.
You can only contribute to an HSA only if you have a high-deductible health plan. For 2022, you can contribute up to $3,650 for individual coverage and up to $7,300 for family coverage into an HSA. These HSA funds roll over year to year if you don’t spend them. And these funds can earn nontaxable interest.
“In the end, everyone is going to have health expenses. This is just another option,” Oestreicher said.
For those who are self-employed, these are additional options:
A solo 401(k) is similar to an employer-sponsored 401(k). However, the individual acts as both the employer and employee—meaning you can contribute as both the employer and the worker. You can contribute into a traditional or Roth solo 401(k).
A simplified employee pension (SEP) allows individuals to contribute pretax earnings. Only an employee can contribute to an SEP IRA, not the employer.
Simple IRAs are available for small businesses with fewer than 100 employees. Employees can contribute pretax dollars, while employers can match contributions.
“Given the range of options, it can be challenging to decide what is best. Consulting a tax adviser, as well as a financial adviser, can be helpful,” Morrissette said.
Even if you’re on your own in saving for retirement, there are ways to do it.
“It’s not uncommon to focus on the day-to-day. There’s the idea that retirement planning can be left for tomorrow. But retirement planning is for everyone. Saving for the present is helping create that future you want to have,” Gandhi said.
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