The self-employed community plays a pivotal role in the economies of nations. The changing patterns of employment have changed how people work and how they save, invest, and prepare for their retirement.
Growth of the Self-Employed Economy
The self-employed economy, including freelancers, contractors, small business owners, and sole proprietors, is growing fast, especially in the emerging markets. The workers are taking advantage of technological innovations and digital marketplaces to steer away from the traditional forms of employment and work for themselves in a way that meets their demands, needs, and schedules. According to research, , or about 28%, were self-employed in 2019, compared to 15 million in 2015.
The prominent reasons for the rapid increase in self-employment include flexible working schedules, the ability to work remotely, technological developments, and higher compensation than most traditional jobs. Additionally, during the ongoing coronavirus pandemic, more and more people are shifting towards self-employment either due to loss of employment or income diversification.
Retirement Vision of the Self-Employed
One of the significant drawbacks of self-employment is missing out on certain retirement benefits and other employers’ contingency benefits. The self-employed individuals do not automatically enroll themselves in retirement plans and may not be prepared to meet financial emergencies in the future.
Therefore, self-employed individuals must have an independent vision for retirement planning and prepare for it well in advance for financial security in the long term. The principle difference between the retirement vision and planning of self-employed and traditionally-employed is the flexibility.
Self-employed workers can choose when and how to retire as they do not have a mandatory retirement age in most countries. It is interesting to note that according to a research, 33% of sole proprietors expect to retire after 70 years of age or never retire, compared to 21% of self-employed workers with employees and only 18% of traditionally employed workers. The independence to choose the retirement age and push it away by a couple of years may substantially increase the retirement income.
How to Prepare for Retirement
The self-employed that own their own business do not receive specific benefits like employer pension contributions and automatic retirement plans enrolment. Therefore, they need to plan for their retirement on their own, proactively, and more responsibly. It becomes more concerning to know that most of the self-employed workers are not habitual savers and may not be prepared to meet their retirement and other long-term needs.
Self-employed workers follow a do it yourself approach towards their retirement planning. In general, the self-employed are more inclined to save in savings accounts, stocks, mutual funds, bonds, and investment properties than government retirement benefits plans, life insurance, and defined contribution plans. The self-employed also believe in liquidating their business assets at some point in the future to fund their retirement.
Different Visions, Plans, and Preparations in Different Countries
The trends in self-employment and visions and retirement plans can be better understood by . The self-employed workers of different countries differ in their attitudes, expectations, profiles, and saving habits.
For instance, in Australia, about 10.3% of the workers are self-employed and have an official retirement age of 65. Of the self-employed workers, 76% expect a flexible transition into retirement, 28% are confident of being able to afford a comfortable lifestyle post-retirement, and 22% intend to sell their businesses to prepare for their retirement. In terms of planning for retirement, 15% of self-employed Australians have a written retirement strategy, 37% are habitual savers, and 35% have a backup plan.
On the other hand, 15.4% of the workers are self-employed in the UK, with an official retirement age of 65. Compared to Australians, about 68% of the UK self-employed workers plan a flexible transition to retirement, and only 20% are confident of retiring with a comfortable lifestyle. The median personal income of British self-employed individuals is $22,500 and 9% expect to sell their business to fund retirement while many.
The percentage of self-employed workers in the US is rather less at 6.5%. However, of them, 69% envision a flexible transition to retirement, 25% expect to live comfortably after retirement, and 15% plan to sell their businesses to prepare for retirement. In terms of planning for retirement, 39% of the American self-employed have a backup plan, 20% have a written retirement plan, 72% do not have a tax-deductible retirement plan, and about 36% are habitual savers.
Thus, self-employment offers several unique advantages in terms of flexibility, saving, and planning for retirement; however, it also lacks a regular flow of income and government and employer benefits. Therefore, the self-employed workers must get into the habit of saving early and regularly and using the tax advantages and government-sponsored retirement programs to save for their retirement. They can also automate their savings each month to create a stronger corpus for their retirement.
An efficient financial plan and the support of a financial planner goes a long way in achieving these objectives.