Retirement Planning for Self-Employed Contractors

Retirement Planning for Self-Employed Contractors

Here’s a reality check: 40% of self-employed workers have less than $1,000 saved for retirement, according to the Employee Benefit Research Institute. For contractors, this number is even higher. Why? Because when you’re focused on the next job or equipment purchase, retirement feels like a luxury you can’t afford.

But here’s the truth: Your body won’t handle physical contractor work forever. Whether it’s your back, knees, or just decades of wear and tear, there will come a day when you need to step back from the tools. The question is: will you be financially ready?

The good news? Self-employed contractors have some of the best retirement savings opportunities available—if you know how to use them.

Why Your Body Has an Expiration Date

Let’s be honest about the physical demands of contractor work:

Your 20s-30s: You feel invincible. 12-hour days are no problem. Your 40s: You start feeling the wear. Recovery takes longer. Your 50s: The body sends clearer signals. Some tasks become genuinely difficult. Your 60s+: Physical contractor work becomes increasingly challenging.

Even if you love what you do, your earning capacity will likely decline. Planning for this isn’t pessimistic—it’s realistic.

The Income Replacement Reality

Traditional advice says you need 80% of your pre-retirement income. But contractors often need less because you’ll eliminate:

  • Equipment purchases and maintenance
  • Vehicle and fuel costs for work
  • Business insurance and licensing
  • Marketing expenses

The reality: Most contractors can maintain their lifestyle on 60-70% of peak earning years, especially with a paid-off home.

The wildcard: Health insurance until Medicare kicks in at 65 can cost $1,000-2,000+ monthly for families.

Best Retirement Accounts for Contractors

SEP-IRA: The Contractor’s Best Friend

What it is: Allows you to contribute up to 25% of self-employment income, maximum $69,000 in 2024.

Why contractors love it:

  • Easy to set up with no ongoing paperwork
  • Flexible contributions (more in good years, less in lean years)
  • High contribution limits
  • Tax deductible (reduces taxable income dollar-for-dollar)

Example: $80,000 self-employment income = up to $20,000 SEP-IRA contribution = $4,400-7,400 in tax savings.

Where to open: Fidelity, Vanguard, or Charles Schwab.

Solo 401(k): Maximum Savings Power

What it is: 401(k) for self-employed with no employees (except spouse).

The advantage: Higher limits—up to $69,000 in 2024 ($76,500 if 50+).

How it works: Contribute as employee ($23,000 max) and employer (25% of income).

Best for: Contractors with consistent six-figure incomes wanting maximum tax savings.

Traditional vs. Roth Strategy

Traditional: Tax deduction now, taxed in retirement. Best if you expect lower tax bracket in retirement.

Roth: No current deduction, tax-free retirement withdrawals. Best for younger contractors or those expecting higher future tax rates.

Contractor strategy: Use traditional in high-income years, Roth in lower-income years.

Simple Investment Strategy

The Three-Bucket Approach

Emergency Fund (6-12 months expenses): High-yield savings at Marcus or Ally Bank

Medium-term (2-10 years): Conservative balanced funds (40% stocks, 60% bonds)

Long-term retirement (10+ years): Growth-focused index funds (70-90% stocks)

Low-Cost Index Fund Portfolio

Simple three-fund portfolio:

  • 60% Total Stock Market Index (VTSAX)
  • 20% International Stock Index (VTIAX)
  • 20% Bond Index (VBTLX)

Even simpler: Target-date funds automatically adjust allocation as you age.

The Percentage-Based Savings Strategy

Instead of fixed dollar amounts, save percentages that scale with contractor income:

Lean months (under $5,000 revenue): 5-10% to retirement Average months ($5,000-10,000): 15-20% to retirement Great months (over $10,000): 25-30% to retirement

This approach ensures you save more when you can afford it and less when cash is tight.

Don’t Forget Health Savings Accounts (HSAs)

If you have a high-deductible health plan, HSAs offer triple tax advantages:

  • Deductible contributions
  • Tax-free growth
  • Tax-free withdrawals for medical expenses

2024 limits: $4,150 individual, $8,300 family, plus $1,000 catch-up if 50+.

After 65, you can withdraw for any purpose (taxed as income), making it a stealth retirement account.

Common Contractor Retirement Mistakes

Starting too late: $300/month at age 25 = $878,570 at retirement. Same amount starting at 35 = $407,224.

Ignoring tax benefits: Retirement contributions provide immediate 22-37% “returns” through tax savings.

Too conservative early: Inflation beats up cash over 30+ years. Young contractors need stock growth.

No disability insurance: You’re more likely to become disabled than die. A back injury could end your career decades early.

Business-only retirement plan: Don’t bet everything on selling your business. Build wealth outside it too.

Your 30-Day Action Plan

Week 1: Choose and Open Account

  • SEP-IRA for simplicity
  • Solo 401(k) for maximum contributions
  • Open at Fidelity, Vanguard, or Schwab

Week 2: Fund and Invest

  • Set up automatic monthly transfer from business checking
  • Choose target-date fund or simple three-fund portfolio
  • Start with whatever feels comfortable

Week 3: Optimize

  • Review tax benefits with your CPA
  • Get disability insurance quotes
  • Consider HSA if you have high-deductible health plan

Week 4: Plan and Automate

  • Set calendar reminders for quarterly contribution reviews
  • Plan to increase contributions by 1% of income annually
  • Document everything for spouse/family

The Power of Starting Small

You don’t need perfection—you need to start.

$300/month into a SEP-IRA with target-date fund. That’s it. Over 30 years, this becomes nearly $740,000 (7% average returns).

Add the immediate tax benefits, and you’re building wealth that provides $30,000+ annual retirement income.

Every year you delay costs you significantly. Every year you save builds unstoppable momentum.

Beyond the Numbers

Retirement planning isn’t just about money—it’s about freedom to choose:

  • Consulting and mentoring younger contractors
  • Light specialty work you enjoy
  • Time with family and hobbies
  • Volunteer work in your community

The goal isn’t to stop working—it’s financial freedom to work on your terms.

Start This Week

The best retirement plan is the one you actually implement.

You’ve spent your career building things that last. Now build a retirement that lasts too.

Unlike gambling on your business value at retirement, consistent saving is completely within your control.


Need help implementing these retirement strategies? Check out our recommended tools and software in the Essential Tools section above, or explore our full guide to contractor business strategy here.

Disclosure: Some links in this article are affiliate partnerships that help support ContractorWorldLand at no extra cost to you. We only recommend tools and services we believe provide genuine value to contractors.

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