I’ve witnessed interesting trends happening among corporate executive clients. Many have left big corporate jobs and established their own consulting businesses. After more than 60 hours, they found a lot of advantages: good income, more control over their schedule, and the ability to select clients and projects of interest.
Nearly half (46%) of more than 1,500 Americans ages 60 to 75 surveyed in a recent survey by reverse mortgage lender American Advisors Group said they plan to work part-time in retirement.
Based on the many positive comments I’ve heard from clients who’ve made this transition, I’ve come up with this concept in many retirement planning discussions with executive clients who are still working full-time. I shared how one client started getting consulting opportunities before officially retiring. Another told everyone he was going fishing for six months. But when he returned, the job was waiting and he now had a strong consulting business.
An important aspect of working for yourself is how to recreate the benefits you may have received from your previous employer. Self-employed people, such as consultants, have options, like their employer’s plan, that allow them to continue saving for retirement while reducing taxes.
Here is a quick summary of financial matters you need to know before turning to consulting:
Self-employed save for retirement
Self-employed people can have a separate 401(k) retirement plan, a simplified employee pension (SEP) plan, and if they have enough income, a cash balance pension plan. In some cases, they will be able to save more money on a pre-tax basis compared to their former employer’s 401(k) plan.
- Through a separate 401(k) plan, Self-employed individuals can defer $20,500 of their income into the plan if they are under the age of 50 and $27,000 of their income if they are 50 or older. In addition, self-employed individuals can make “employer” contributions on their behalf, up to a maximum total deposit of $61,000 in 2022 (or $67,500 for those 50 and older). Best practice is to set up a separate 401(k) plan by December 31, as you should have a deferred election by that date, but you must have the funds in your account and claim your tax deduction by the tax filing deadline declaration form.
- SEP IRA Allows you to contribute up to 25% of your self-employment income, up to $61,000 by 2022. A SEP IRA can be established and funded at any time before you file your tax return and claim a deduction.
- cash balance plan Enables high-income business owners or self-employed individuals to accelerate their retirement savings and realize significant annual tax deductions. The amount you can defer into these plans depends on many factors, including your age, income, and plan document rules. In some cases, you can save hundreds of thousands of dollars a year on a pre-tax basis, which can be huge if your income is high enough that you don’t need it all to make ends meet.
Health, Life and Disability Insurance Options
Many people who have worked for large companies for a long time are shocked to learn how much small business owners and self-employed people pay for insurance. In some cases, if you do not have a group retiree health plan to enroll, or are not eligible for Medicare at age 65, it may make sense to choose COBRA for a period of time after you leave a large employer. otherwise:
- You can purchase insurance through the Affordable Care Act. If you manage your income carefully, you may be eligible for a subsidy to help cover expenses.
- You can seek coverage through your spouse or partner’s workplace policy.
- You can buy short-term plans to fill in the gaps until you qualify for health insurance.
With the exception of health insurance, most employer plans do not allow you to keep group term life and disability insurance plans after you leave, or if you can, you must convert them to individual policies and pay the corresponding (and higher) premiums.
If you still need this type of coverage, start shopping early. As a new business owner or self-employed, disability insurance can be difficult to obtain because you don’t have a regular income history in your new job. For life insurance needs, term life insurance is often a wise choice as the premiums are lower and may remain the same for the life of the policy.
Taxes: Be prepared for a bigger bite (and some possible deductions)
Self-employed people will pay a new set of taxes compared to working for a large company. For example, you’ll pay the Social Security and Medicare taxes your employer owes. In 2022, the Social Security tax rate for self-employment income up to $147,000 is 12.4%. There is no such income cap for Medicare taxes; you pay the Medicare tax rate of 2.9% on all self-employment income.
On the other hand, you are entitled to several tax deductions to offset the costs of running a small business. While this is not specific tax advice, some examples include: home office, computer, printer, cell phone, car rental payments, and miles. If you do business, you can also deduct travel expenses—airfare and hotels, as well as dinners with clients and colleagues.
Financially, transitioning from a corporate job to being self-employed helps a person make the transition from a big paycheck more smoothly. With the ever-changing workforce in today’s business world, it’s good to know you have this option.
CI Brightworth Partner and Wealth Advisor
Lisa Brown, CFP®, CIMA®, is the author of “Girl Talk, Money Talk, The Smart Girl’s Guide to Money After College” and “Girl Talk, Money Talk II, Financially Fit and Fabulous in Your 40s and 50s”. She is the practice area leader for corporate professionals and executives at CI Brightworth, an Atlanta wealth management firm. Providing financial advice to busy corporate executives has been her passion in the office for nearly 20 years. Outside of the office, she is an avid runner, cyclist and supporter of charities, focusing on homeless children and their families.