Steven Van Metre

Steven Van Metre

A new study from Merrill Lynch and Age Wave concludes our retirements are the most expensive “purchases” we will make in our lifetimes.

It is 2 ½ times more expensive than the average cost of a new home, nine times the cost of a college education and nearly three times more than the cost of raising a child to age 18.

The study estimates we will spend $700,000 to support ourselves during our retirements. Depending on where we live, the retirement lifestyles we desire and other factors, such as health, that amount could be more or less. And as medical science extends our life spans and the cost of living climbs, the amount we will need to “purchase” our retirements will grow.

Generally, Americans look to three sources to fund their retirements: Social Security, employer-provided pensions and personal savings.

But as an increasing number of people are becoming self-employed — pursuing lifetime careers in the “gig economy” as contractors and as entrepreneurial small-business owners — retirement income is no longer coming from these three sources. Fewer employees and no self-employed entrepreneur can rely on employers for help. And we can only hope Social Security will remain in place to provide a barely subsistence monthly check.

The small-business entrepreneur and the self-employed individual basically are alone to acquire their retirement savings.

The Transamerica Center for Retirement Studies, in collaboration with Aegon Center for Longevity and Retirement, recently surveyed 1,600 self-employed people in the U.S. and 14 other countries. Researchers found more than two-thirds expect to live “flexible” retirements, with nearly one-third saying they would work at least part time in retirement. Twenty-three percent said they would never be able to retire.

Studies have shown that people employed in workplaces that provide tax-deferred retirement savings plans are likely to save for retirement. The self-employed have inconsistent earnings and often all their money goes to supporting themselves or to growing their businesses.

The future is clear and somewhat frightening. More people are self-employed. Fewer people are covered by employer pension plans. Congress is debating the future of Social Security. A tsunami of baby boomers is heading into retirement. An economic crisis looms.

While much still must be done to address this crisis, plans have been established to help people save for retirement. These plans include “solo” 401(k) plans, traditional individual retirement accounts and MyIRA, which is a simple “beginner” plan for workers.

But the best retirement savings return for a self-employed person may be a simplified employee pension individual retirement arrangement, or a SEP-IRA. Businesses of any size can set up a SEP-IRA, but the self-employed individual without any employees benefits most.

The solo self-employed individual can contribute 25 percent of his or her compensation, or $54,000 a year — whichever is less — to this tax-deferred retirement savings account. This amount is much higher than the $5,000 annual contribution limit to a traditional IRA and exceeds limits set on 401(k) plans. Contributions to a SEP-IRA are tax deductible.

SEP-IRAs are flexible. You can contribute any amount within the limit at any time during the year. If money is tight, you can even skip contributing to the plan altogether. Money in the plan can be rolled over into another type of retirement account. With the payment of a 10 percent penalty, money can be withdrawn prior to retirement. Penalty-free distributions begin at 59 ½ years of age, with required minimum distributions beginning at 70 ½ years of age.

Nearly every bank and brokerage firm offer SEP-IRAs. To easily set up an account, consult with your financial adviser.

There is no “cure” for old age and no avoiding the time when you eventually have to retire. Planning and saving for retirement can make those “golden years” a time to welcome.

— Steven Van Metre is a Bakersfield certified financial planner who specializes in retirement income strategies and teaches courses on retirement planning for the Levan Institute for Lifelong Learning at Bakersfield College. His website is www.stevenvanmetre.com.

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