Financial Planning Tips for Self-Employed Older Adults

 

Earlier this year, a new Facebook group started in my 55+ community: a group for self-employed residents with small businesses including hair styling, dog-walking and grooming, airport drivers, real estate sales, website design, computer repairs, wood-working and crafts, and more. 

As a financial education solopreneur who works from home, I was happy join a group of kindred spirits to share information about each other’s products and services.

 

We are not alone. The number of self-employed older adults has been steadily increasing in recent years driven by factors such as longer life expectancy, changing attitudes toward work in retirement, and technology advancements that enable remote work. 

Other factors are a desire for flexibility and work-life balance (i.e., more time for leisure activities, travel, and family) and ageism, which is easier to mitigate when you “hire yourself” and are your own boss. 

Below are five financial planning tips for older adults who are newly self-employed:

 

Keep Good Records- Use an Excel® spreadsheet or other easy-to-use record-keeping method to track business income and expenses (e.g., office supplies, equipment, travel, marketing, and professional services). It is also easier to keep personal and business finances separate by maintaining dedicated bank accounts and credit cards for business transactions.

 

Stick to a Schedule- Invoicing clients promptly and following up on overdue payments can maintain healthy cash flow and avoid disruptions to personal finances. Set aside a portion of self-employment income to send to the IRS for quarterly estimated tax payments (and/or over-withhold on a pension or Social Security) to ensure compliance with tax regulations.

 

Continue Retirement Plan Contributions- Older self-employed adults can continue to contribute to Roth or traditional individual retirement accounts (IRAs) and simplified employee pension (SEP) or SIMPLE IRAs. Contributions to non-Roth accounts are often tax-deductible, thereby reducing adjusted gross and, ultimately taxable, income. Also remember that self-employed older adults will continue to pay FICA tax equal to 15.3% of net business income. They can be on Social Security and Medicare while earning money from self-employment.

 

Don’t Overlook Health Insurance Tax Premiums- Self-employed older adults who pay their health insurance premiums (including Medicare) may be eligible to deduct these expenses as an adjustment to gross income. This includes premiums for medical and dental insurance for themselves and their spouse as long as their business income exceeds the health care expenses and they do not have retiree health insurance from a previous employer.

 

Consider Business Insurance- Depending on the type of enterprise, types of business insurance that can help protect business and personal assets include an E&O (errors and omissions) policy, business property insurance, and liability insurance. Also, some airport drivers in my community drive their clients’ cars to avoid business use of their own vehicles.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

Ten Benefits of Self-Employment in Later Life

 

Almost half of all U.S. workers age 65-69 are self-employed as are over two-thirds (68%) of those age 75-79. For almost four years, I have been a full-time financial education entrepreneur. For 27 years prior, Money Talk was a “side hustle.” For this post, I decided to reflect upon ten benefits of self-employment in later life that I (and other older entrepreneurs) have experienced:

Additional Income- A successful business provides additional cash beyond Social Security and other expected sources of income in later life. Net business earnings can pay living expenses or provide cash for “extras” such as travel and entertainment and home upgrades. Earning $40,000 in business income is equivalent to withdrawing 4% of a $1 million retirement portfolio.

 

Higher Social Security Benefits- This can happen in two ways. First, self-employment income  can replace low earnings from a worker’s teens or 20s in Social Security’s 35-year benefit calculation formula. Second, earning net business income may allow someone to postpone claiming Social Security beyond full retirement age and benefit from delayed retirement credits.

 

Tax Write-Off for Self-Employment Tax- On line 15 of Schedule 2 (for a 1040 form), self-employed workers can write off the deductible portion of their self-employment tax (calculated on Schedule SE), which will lower adjusted gross income (AGI), a trigger for many other taxes.

 

Tax Write Off for Health Insurance- On line 17 of Schedule 2, self-employed workers can take an “above the line” deduction for health insurance, which lowers their AGI. For older entrepreneurs, Medicare Part B and D premiums and IRMAA, for both themselves and their spouse, can be written off against net business income, effectively making Medicare “free.”

 

Tax Deductions- Tax deductions that entrepreneurs can take include continuing education, mileage, home office expenses, professional dues and certifications, and office expenses.

 

Structure, Meaning, Purpose, and Creativity- Entrepreneurship provides structure to an older adult’s day as well as the satisfaction of doing something meaningful, especially if it helps others. There is no boss to “call the shots” and fewer limits on how/when work gets done.

 

Flexibility- Many older adults who want to work in later life also crave flexibility. Self-employment provides this in spades as entrepreneurs set their own work hours and days off.

 

Back-Up Income- When older adults start a business, they often have back-up income sources such as Social Security, a pension, or an annuity. This makes entrepreneurship less risky in later life versus young entrepreneurs who may rely on a business as a primary source of income.

 

Continued Growth and Learning- Entrepreneurship requires older adults to stay mentally sharp by keeping up with the latest information in their field and with technology advances.

 

Better Mental Health- One recent study found that self-employment is negatively associated with depression among aging workers, although this relationship weakened over time. The researchers concluded there are substantial health and well-being benefits to self-employment.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.