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Retirement Strategies for the Self-Employed

Geoff Williams

Christopher Nelson is 44, and like many of his self-employed brethren, he has nothing saved for retirement.

He still has time. He also has plenty of reasons to think the future is bright. He is the chief financial officer of Glass Handbag, a company that sells high-end handbags outfitted with integrated light systems.

He runs it with Tamara Leuty, Glass Handbag's inventor and founder.

"I am hoping Glass Handbag takes off and creates the retirement I desire," Nelson says.

Of course, Nelson has ample reason to worry that he won't have the retirement he desires. According to the Small Business Administration, 50 percent of new businesses won't celebrate their five-year anniversary. Two-thirds won't reach the 10-year milestone. Glass Handbag started four years ago.

Nelson has another job as a real estate appraiser, making a little over $100,000 annually, but he says he hasn't managed to save anything for retirement. He put away $150,000, but that went to Glass Handbag. It doesn't help that he is shuttling between two cities with a high cost of living: Las Vegas and New York, where he and his fiancee are moving.

"I haven't had any retirement [savings] for about five years, and it makes me very worried. Sometimes, I don't sleep well at night," Nelson says. "The thought of knowing you can't survive without working, even for a short time, is very nerve-wracking."

[Read: The Best Budgeting Strategies for the Self-Employed.]

Unfortunately, there are a lot of people like Nelson lying awake at night. Financial services provider TIAA-CREF recently surveyed more than 1,000 adults and found that 21 percent of those who hadn't retired had nothing saved for retirement. Forty-four percent had saved 10 percent or less of their current annual income. And yet 37 percent surveyed said they planned to retire before age 65.

How much should you be putting away? Most experts say at least 15 to 20 percent of your annual salary should be going toward retirement.

That can be a challenge for anyone, of course, but when you're self-employed, cash flow can be sporadic. Income from clients may not show up when expected, or not at all if business is bad. Even if you can pay your bills, extra money may go right back into the business.

"Many small business owners pay themselves last while they are building their business," says Thomas Goodson, founder and CEO of AmeriFlex Financial, a financial planning and wealth management firm in Santa Barbara, Calif.

Kelly Costello, who lives in Pittsburgh and owns puppycake.com, which manufactures and sells specialty dog treats, is emblematic of many entrepreneurs.

"I cashed in my 401(k) from my first corporate job shortly after the recession to keep my business afloat, and I have yet to put a dime toward retirement," says Costello, 28. "Right now, my priorities are pay myself a small salary, get out of debt ... build a six-month emergency fund. Then I will work on building savings and putting it toward retirement."

What sort of retirement plan do I need? Financial advisors often suggest strategies that work well for self-employed people raking in money but not so well for those who aren't yet. And many self-employed people don't have anyone to advise them on their personal finances.

"If you are a small business owner with enough money for a financial advisor, you are one of the few lucky ones," Nelson says.

But if you can regularly put away money for retirement, consider starting a simplified employee pension individual retirement account, says Joe Jennings, investment director for PNC Wealth Management.

He says SEP IRAs are popular retirement savings vehicles for business owners and self-employed individuals.

"There are contribution limits for self-employed individuals," Jennings says. "From an investment standpoint, the vehicle is the same as any other IRA account and provides a great deal of flexibility regarding investment options."

The maximum amount a self-employed individual can put into a SEP IRA in 2014 is $52,000.

If you're spitting out your coffee and rolling your eyes, a Roth IRA is probably more your speed. The maximum contribution for a Roth IRA in 2014 is $5,500; if you're 50 or older, it's $6,500. To contribute, you can't make more than $127,000 a year if you're an individual filer or $188,000 if you file jointly.

[See: The Best Side Business Ideas for Busy People.]

Just don't put it off. There's a reasonable argument for delaying retirement saving if you're young and your business needs all of your cash, and it seems poised to grow. But if your company is more about making a good living for you and your family, not saving enough for retirement is a risk you shouldn't take.

David Cohen, 52, is an instructive example. He lives in Philadelphia, and about 20 years ago, after finding himself miserable as a pastry chef, he started an events planning business revolving around his love for classical music. An accomplished musician, he plays the classical and flamenco guitar, Chinese pipa and bagpipes.

For about two decades, Cohen and his wife, Tatyana, a dental hygienist, made an honest living, raised a son and put him through college. Thanks to guitarpoint.net, he was frequently booked solid in Pennsylvania and neighboring states.

Then in 2008, the Great Recession took hold, and corporations and individuals didn't have the extra money to hire classical musicians. Cohen's self-employment imploded, virtually overnight.

Cohen, now in his mid-40s, decided to attend Temple University. His family never had the money to send him to college, and he felt a diploma would help him become employable. He majored in tourism and hospitality management. But he had to suspend his studies a few times. Tatyana was diagnosed with cancer.

"On Valentine's Day, three years ago, she went into the hospital for chemo, and she never came home," Cohen says.

He now has a diploma -- Tatyana urged him to finish school -- but at age 52, Cohen is a combination of unemployed and under-self-employed, still performing but not enough. He's trying to carve out a career making hospitals more hospitable, an idea he formed while spending far too much time in hospitals. He consults at hospitals on a volunteer basis but hasn't landed a paying, permanent position yet.

The Cohens did put some money away for retirement, most of it through Tatyana's pension. That is gone now.

Cohen fully agrees that his story is a good argument for not putting off saving for retirement, and for saving as much as possible.

[See: 10 Questions That Can Help You Earn More Money.]

One moment Cohen sounds full of hope and promise about the idea of someday having plenty of income to live on during his golden years. "I'm not giving up because that's not part of my makeup," he says.

But almost in the same breath, he talks of being in his early 50s and having next to nothing saved for retirement: "It's definitely scary, and I will have to work the rest of my life."

Cohen says he sometimes goes to Sam's Club and watches the greeters. "I check out their technique and see what works the best," he says.

He envisions someday being a senior citizen and when dining out, "getting the higher premium cat food," he says.

He is kidding -- sort of.

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