Many think of consulting as a short-term career, something to do for a while before returning to a "real" job. Though some consultants do eventually change their careers, many of us find that this is our true path. Thus, we have to examine how consulting fits into our entire life, especially with respect to retirement. The prospects for a consultant contemplating retirement are mixed. The bad news is that you have to take complete responsibility for your retirement without the benefits of a company's retirement plan. The good news is that there are good income deferment options available; in fact, you have considerable flexibility in how and when you actually retire.
To save money for retirement, there are two good tax plans available for the self- employed. One is the Simplified Employee Pension Individual Retirement Account (SEP IRA) and the other is the HR-10 or Keogh plan. The SEP IRA is the simpler of the two, and the one that I use. Each year, you can defer about 15 percent of your income, but no more than $30,000, into a SEP IRA plan; you can withdraw money from the account without penalty six months after your 59th birthday. Setting up a SEP IRA is easy. Just go to your favorite mutual fund company or other financial institution and request a SEP IRA application form and application form for the particular fund in which you wish to invest.
Once established, investing in the fund is easy, too. Just send in payments on your own schedule, with April 15 the deadline for the previous tax year. I usually make a couple of payments during the year, with the final one in April designed to hit my maximum contribution; my accountant calculates it all as part of my tax return. You can designate almost any kind of investment as a SEP IRA investment, so long as your investment firm supports it. I stick to stock index mutual funds, but others can dial in the amount of market risk with which they feel comfortable.
While a Keogh plan supports employees, self-employed individuals can also use it. It is more complex to set up, and allows contributions of up to about 25 percent of income, though again these contributions are capped at $30,000 per year. I recommend using an accountant for setting up a Keogh plan. You can learn more about both types of plans from IRS tax publication 560, "Retirement Plans for Small Business" (see the Resources section below for a link).
What about the matching funds that employers offer for retirement options such as 401k plans? Are you missing out? Not really; as we discussed in an earlier column, "Setting Rates: How High Should You Go,” you should set your consulting rates to cover you for the benefits that you have to provide yourself, such as health insurance, vacation, and retirement benefits.
Those are the mechanics. But there is more to consider. The corporate world today is all or nothing: work hard until age 65 and then suddenly stop. When the time to stop comes, many retirees don't know what to do with their free time. But as a consultant, you can customize a much smoother exit strategy. For instance, you can execute your retirement in stages. You might work at a 100 percent level in your 40s, but once solidly established you could work 75 percent of your time in your 50s, giving yourself 25 percent of your time for other pursuits. In your 60s, you could move to 50 percent work; once you hit 70, you can go into a dabbling mode, maybe to write a book. This flexibility, if you exploit it, can result in a truly rewarding lifestyle.
IRS tax publication 560, "Retirement Plans for Small Business" (in PDF format): http://ftp.fedworld.gov/pub/irs-pdf/p560.pdf