Saving for Retirement... in Retirement // // early retirement, financial independence, retirement savings, adventure, happiness, solo 401(k), traditional IRA, work in retirementwe retired early

Saving for Retirement… In Retirement

We spent the last six years of our careers furiously plowing funds into our retirement accounts, assuming that that was our last real chance to save for retirement. All the while planning for two phases of retirement, building in only the most conservative growth estimates, baking in scads of contingencies, the whole bit.

So guess what we’re doing this year? Saving for retirement.

Let’s talk about the story of how we came to save for retirement… in retirement.

Saving for Retirement... in Retirement // // early retirement, financial independence, retirement savings, adventure, happiness, solo 401(k), traditional IRA, work in retirement

Deviating From the Plan

We built an early retirement plan that has a very good chance of turning out to be overly cautious and even foolishly conservative. Or, if we hit a bad sequence of returns, we could look like geniuses who had the good sense to save more than the problematic four-percent rule tells us we must. We won’t know which it is — fools or geniuses — for at least a decade. But either way, given who we are and our economic anxieties, we wouldn’t have pulled the plug on our well-paid careers if we weren’t sure that we’d saved enough to last us forever.

Built into that plan was the assumption that we’d start withdrawing from our investments this year, along with using the interest from our personal loan and the taxable dividends from our index funds, to fund our living expenses. But then my lifelong dream came true, and Mark got a very part-time consulting offer on a passion project that was kind of too good to be true, and we suddenly found ourselves earning some money we don’t entirely need and not withdrawing that money from our investments after all.

And we had some decisions to make.

Self-Employment and All Kinds of New (To Us) Rules

A few basics about our current earning situation:

  1. Mark and I left our W-2 jobs at the end of last year and since then have been “self-employed” in a tax sense for income we’ve received this year, mostly from my book plus Mark’s small passion project consulting side hustle. “Self-employed” is not the best term for our situation given that we’re really mostly self-funemployed, but we’ll not try to argue with the IRS about this. Audit fears and all.
  2. As self-employed people, the IRS considers us each to be sole proprietors, and we owe quarterly self-employment taxes because there is no employer withholding taxes and paying payroll taxes for us. Sole proprietor is a default designation that requires no incorporation or special filings, and after weighing the costs of LLCs and S-corps, especially in light of California’s business tax rules (short version: they tax everything, you don’t really save money and may actually spend more trying to incorporate in another state, and the minimum tax is high), along with the much more relevant fact that we don’t plan to have side hustle income for most of our early retirement years, and it made sense to stay with the default option. Paying quarterly taxes is not especially fun, but we have reminders set up and we’re just making it part of our financial management process. In future years, we’ll likely automate the payments, but we haven’t done that this year, because we’ll owe these taxes even if we don’t work at all on our rental income and any other income that counts as “earned.”
  3. Also as self-employed people, we have to buy our own health insurance off of the exchange (in our case Covered California, not the federal exchange), and the price we pay is based on the income we projected for this year back in December of last year.

Related post: Signing Up for ACA/Obamacare Health Insurance for Early Retirement

All Kinds of New (To Us) Decisions

So here we are, earning a little money we never expected to earn. Which is obviously great, because no one is ever sad about having more money or more wiggle room. But it does mean we have some decisions to make. With this additional cash, we can:

  1. Just treat it like income, spend it if we feel like it, pay the higher taxes on it and owe back some of our health insurance premiums when we do this year’s taxes next spring.
  2. Use it to begin funding the Roth IRA accounts we wish we’d saved for ourselves, but because those are after-tax funds, it would mean paying all the income tax and self-employment tax we’d owe on those dollars, along with paying back health insurance premiums.
  3. Fund traditional IRA and solo 401(k) accounts with pre-tax dollars above and beyond what we’d expected to earn, on which we then wouldn’t owe taxes (mostly), and wouldn’t have to pay back as health insurance premiums, and we’d have an even bigger cushion for our traditional retirement and later years, especially all those looming health care what-ifs.
  4. Add to our donor advised fund (DAF), though given the higher standard deduction built into the new tax law, our absence of mortgage and our now-low state and local taxes, we’d have to give a fairly massive chunk to make it worth itemizing instead of claiming the $24,000 standard deduction for married filing jointly. And in that case, we’d still have to pay back the health insurance piece, because charitable giving isn’t subtracted from modified adjusted gross income (MAGI), the number used to calculate health insurance costs.

Saving for Traditional Retirement in Early Retirement

We ultimately decided to pad our savings for phase two of retirement (our traditional retirement, after age 59 1/2) while in phase one of retirement (early retirement) for several reasons:

  1. We don’t have any other demands on the additional funds we’ve earned this year, so can afford to lock them away for the future.
  2. The law allows us to save through several different vehicles, including traditional IRAs (that we couldn’t use in our higher earning years because we were above the limits) and solo 401(k)s.
  3. We’re already freaked out about high tax audit risk for this year given that we’ll both have gone from well above average salaries to far less exciting earnings in a non-recession year, at a non-retirement age, and fear that doing a big pay back of health insurance premiums on our next tax return could add an additional audit flag. Better to match what we projected.
  4. If we later realize we want those funds sooner than traditional retirement, we can do a Roth conversion to access them within five years or — worst case — we could just eat the 10 percent tax penalty because it was gravy money anyway.

With the decision made, it’s now just a question of where to send that money. And we have some choices:

Traditional IRAs — For 2018, the IRA contribution limit is $5,500 per person ($6,500 for those over 50), giving us the potential to save $11,000 this year for traditional retirement.

Solo 401(k), “employee contribution” — Solo or self-employed 401(k)s function much like employer-sponsored 401(k) plans in that they have the same employee contribution limits ($18,500 in 2018, $24,500 for those over 50) and they are also pre-tax contributions. But…

Solo 401(k), “employer contribution” — … They also allow you, a sole proprietor, to act as not only the employee, but also the employer, and to make an “employer contribution” up to 25 percent of your earned income, so long as your total solo 401(k) contributions don’t exceed $55,000 for 2018 ($61,000 for those over 50). Theoretically, this could allow us to save $110,000 combined in tax-advantaged retirement funds, but to do that, we’d each have to earn nearly $150,000, and that is hilarious. We’re still early retired despite some earnings, after all.

SIMPLE IRA or SEPSIMPLE IRA and SEP plans are other tax-advantaged retirement saving options for small businesses and sole proprietors, but they’re so much more complicated to set up and require filing many more tax forms than solo 401(k)s that they aren’t worth seriously considering.

Our plan, given the choices, is to start basic, with traditional IRAs. If we max those out and still wish to save more, we can move into the employee contribution portion of the solo 401(k). And in some imaginary universe in which we earn multiple six figures as early retirees (ha!), we could pretend to contribute against the employer portion. But if we ever get to that point, let’s be honest: we’ll be jetting off to Singapore instead and gladly paying the income taxes. ;-)

Chime In!

Would you ever consider contributing to your retirement savings after already retired? Have you done something like this, for folks who are retired already? Got a better idea for how we should use this money instead? Let’s discuss it all in the comments!

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58 replies »

  1. Looks to me like the simple IRA option is the best. No need to complicate things unless you need more than the $11,000 limit.

    You could have worse problems :)

  2. This is so cool! Thank you so much for sharing your thought process on what to do with the money. I think you chose the best option. I can only hope to have a similar ‘problem’ in retirement. Great job!

  3. This is basically the conversation I’ve been having with my MIL for the last few months ;) She’s now “retired” (a little early) but got re-hired by her job one day a week and so they’re going to be making a good chunk more than expected. She’s hyper focused on the taxes, but my take has been more relaxed since it’s all gravy money anyway. Then again, easier when it’s not my money ;)

    • She has the benefit, I’m guessing, of employer payroll withholding and maybe even retirement plan access, which are both an enormous help! You have to do a lot more math when it’s up to you to send in quarterly payments and such. But yeah, if it’s gravy anyway, then paying some to the IRS isn’t a big deal.

  4. We definitely plan to save for retirement in retirement.

    I think our special situation of getting a pension, plus other stuff we do will leave us with extra money. I don’t like to keep too much cash lying around, so it only makes sense to invest it. Once I’ve made that mental leap, it’s not a stretch to want to invest it in the most tax advantaged way(s).

    • Given your pension situation (I’m jealous every time you mention it) ;-) I think it makes total sense to keep investing, and then it’s just a question of whether to keep it accessible in taxable accounts or to lock it away in a more tax-advantaged but also restricted way.

  5. If you are looking to make real estate investments or fund real estate deals, my wife and I have found the Solo 401(k) to be helpful. We opened one last year after I left my W2 job and we consolidated about half of our retirement money in there, looking to diversify away from the stock markets.

    The main benefit we’ve had with it is that it allows us to pool our money collectively to make investments, which you can’t do with IRAs (as far as I know). So far we’ve funded a read estate developer as well as purchased 3 properties. We’d never have been able to make these investments with our more limited non-retirement funds. Only downside is we can’t pull out the earnings without paying the penalty :)

    The other main benefits of the Solo 401(k) is the freedom to act as our own custodian and the full checkbook control. We wrote about it in more detail here:

    • Good info to have. Thanks for sharing! The one thing worth noting with the solo 401(k) is that you have to file extra tax documents on it once the balance is over $200K, and that’s not a requirement with an IRA. So for folks just doing normal investing in mutual funds or stocks, the solo 401(k) might eventually come with more hoops to jump through.

  6. My parents are retired (+65) and my dad still has a part time job. They contribute to IRA’s yearly for both of them up to the amount that dad earns in wages. It reduces their tax bill and makes my dad feel more confident about their retirement nest egg.

    • Good idea, to a degree. I worked for 6 years part-time after I retired in 2009 from the fed govt. I plugged a good chunk of those earnings into the company’s 401(k) plan, till I realized that I’m likely to be in a higher tax bracket once I hit 70.5 and take mandatory RMDs. That, plus the company’s reduction of the 401(k) match, convinced me to scale it back to a minimal contribution.

  7. Thanks for the breakdown on Solo401k! If I ever make any money from the blog, that seems like a neat way to shield up to a quarter of your income via an ’employer’ contribution.

    Though I wonder if you could be working a normal day job, maxing out that corporate 401k, and still make an employer contribution through your side gig business…

    I assume we might run into the same “oops, we found something we love and it makes some income” situation in early retirement. It’s nuts, but it seems a lot of things we love doing might just happen to pay us. :)

    • There are total retirement fund caps that apply across 401(k) types, so between an employer 401(k) and solo account, you couldn’t exceed the $55K limit. And yeah, the “oops” thing is real. I feel quite sure it will happen to you. ;-)

  8. I would highly advise a Solo 401(k) with a loan option. The loan option probably seems silly, but Rob and I already considering taking advantage of it to fund sort of a bridge mortgage for ourselves.

  9. I’m beginning to contemplate this first-world “problem”, as well, while trying to make it very clear to readers that I’ll be retiring from medicine, but will not be done earning money, so typical retirement issues won’t apply the day I step away from my doctor job.

    I’ve already started the solo 401(k) and make employer contributions to it since I can’t make employee contributions as I already max that $18,500 allotted via my main job.

    Since I’ll be working well into 2019, my first self-employment year will be 2020. I plan to put away as much as possible into the solo 401(k), will continue Roth contributions (regular or backdoor depending on income), and may consider whether or not it makes sense for my wife to have a paid role with the site to give us and additional solo 401(k) account to work with.


    • Sounds like a solid approach you’re taking and planning for. And even if your wife doesn’t take a paid role with the site, she can still max a spousal IRA for whatever the limit is at that point. (I know you know that — sharing that for others reading the comments.) ;-)

  10. Unless you’re cheating on taxes, don’t let the IRS audit risk bother you! Let them audit. Worse case, you’ll find out if you’re doing it wrong. From what I hear (no personal experience), they are pretty forgiving of minor mistakes or reasonable misunderstandings of the rules. Sometimes they find mistakes in favor of the tax payer.

    • I agree with yyz. unless you are cheating on taxes or taking some sketchy deductions I wouldn’t worry much about an audit. When I was audited I was very nervous since some of my deductions were related to working away from home out of state. The auditor asked for my documentation for work away from home (rent receipts, food and restaurant receipts, etc.) Looked them over, commentated I had VERY good documentation and that mileage from my place of abode was NOT allowed only from home to the new location and back home on weekends.

      BUT that rule wasn’t being enforced at that time and she would let it go. I was in and out in 20 minutes! At most she would have just disallowed part of the mileage and reassessed my taxes and called it done with no penalties as I wasn’t INTENTIONALLY cheating just misapplying a rule.

    • That is not, in fact, the worst case. There are a bunch of worst cases: you could have made an innocent mistake that comes with a large penalty, you could do nothing wrong but have to hire a tax attorney to manage the audit which could cost thousands, or you could have happen what happened to my parents where the IRS tells you point blank that you’ve done nothing wrong, but that the cost of fighting the case will cost more than just paying the penalty. In my personal experience, they are not forgiving of minor mistakes, it’s highly dependent on who you get as your auditor and in any case, it’s not worth rolling the dice.

  11. Incorporating helps to mitigate the risk of all kinds of ‘business’ liabilities. I am still accumulating but the thought of getting sued scared me when I tried to rent out a condo. I simply don’t like this kind of downside.

    • Incorporating is certainly worth considering, particularly if your work or assets involve liability risk. In California, where we are, the incorporation costs are quite high and incorporating elsewhere is not a real option because CA ruthlessly seeks out folks who’ve done this, and then forces them to register in CA as a “foreign business entity,” which costs just as much as straightforward incorporation. So you have to weigh your own state’s rules and costs (as well as all the additional tax filings and the work/cost that entails) against the many potential upsides of incorporation.

  12. Wow – I read this article and immediately went into tax-management mode LOL – guess that’s what happens when you read too many FIRE blogs :-) Paging Go Curry Cracker anyone?

    My gut feel is to max out the solo 401k and keep your income down as low as possible to maximize the ACA subsidy, which I think you said once that you are claiming. If your income is down in ACA-subsidy range, than income taxes may not be as big of a concern for you?
    Unfortunately I assume that you can’t shield all of the income due to having to claim as income at least a portion of your SE tax, but you could shield most of it. Nice problem to have in any case!

  13. Seems like a good problem to have! I think I would do something similar if I was in the same situation.. why complicate things when that money is all gravy in the first place? Plus, when you enjoy doing something and would do it for free (as I think you may have mentioned?) I guess the worst case where you pay a lot of taxes on it doesn’t seem too bad either 🙂

    • Yeah, agree! No need to stress about tax minimization if the money is gravy anyway. And also yes that it’s all stuff we’d do for free, which is why I’m happy to smack down all the retirement police who feel entitled to share their opinions. ;-)

  14. I love that you leave the option of Living It The Hell Up, if your income grows wildly.

    Mainly, I want to visit Singapore, and it sounds more fun with more money. ;)

  15. Saving for retirement, in retirement? A more accurate title might be–saving for retirement, by not retiring (and continuing to work).

    How is blogging, writing a book, and picking up a part-time consulting project (however subjectively enjoyable) considered retirement. A degree of financial independence to pursue other interests for pecuniary gain? Maybe. Early retirement? Come on.

    Congrats on discovering more fulfilling and satisfying work. But early retirement this is not.

      • The label “retirement police” is for me to apply, not you, and I do not feel like the retirement police, so thus I am not.

        Interesting that you, like many other “FIRE” bloggers, are so reflexively defensive to anyone that might challenge your assertions (e.g. “I say I am retired, thus I am”). Also interesting that you are so quick to apply labels to others.

        I enjoy your writing and congrats on achieving FI.

      • I think you misread my response. If you reread it, you’ll see I did not call you retirement police. I shared with you a post that has a good thought exercise for those who have a narrow view of what retirement means, which seems true in your case based on your prior comment. I hope you found it useful. Also curious what you read as defensive here. I’d call it exasperated. It gets tiring to be told by people with a narrow view of retirement (apparently you’re only allowed to sit and do nothing, and if you ever earn a cent you’re no longer retired) that we’re not retired when you don’t know us, you don’t see how much or how little time we spend working, and yet you feel it’s your right to make a proclamation. I know many of my fellow bloggers feel the same way. Retirement is the time in life when money ceases to become a factor in your decision-making and you can do whatever the hell you want, not just whatever is on some approved list. Forgive me for being tired of being forced to restate this over and over. Thanks for reading and for the congrats.

      • Replying to your response below (to which there is conveniently no reply function):

        Did I misread the following exchange in your very own comments section?

        —Snarking to Freedom: Oh what a lovely problem to have! You guys are totally aceing this whole early retirement thing (but bewaaaaare of the retirement police😝)

        —Tanja Hester @ Our Next Life: The retirement police are here in this very post! ;-)

        Your incredibly generous definition of early retirement, along with your narrow view of retirement police (not me of course) is what is totally exasperating…maybe we should rename to objective reality police (blog post idea!).

        Feel free to return to the echo chamber.

  16. White Coat investor gave a line by line example of the forms aand it does not look that hard to do.

  17. Well said! You keep on saving for retirement even when you’re past the “early” retirement stage. I use an S-corp to hold self-employment earnings. Yes, in Arizona you do have to pay the taxes when you pay yourself a reasonable “salary” — which need not be much. But you also can use pre-tax money to cover costs that can, with any degree of honesty, be called business-related (the phones & Internet connections, for example). If I were to get a (shudder!) real job again, I would use a Roth IRA rather than a traditional IRA. Because of age discrimination (yup, it IS a real thing) most of us are unlikely to get work that pays enough to generate a major tax gouge, but if you already have a lifetime of savings in a 401(k) or traditional IRA, the RMD can be a b***h. Wish I’d made greater use of Roth IRAS in my working years — missed the boat early on.

  18. I FIREd September ’16, but have picked up contract and part time work intermittently up to present day. I had already maxed 401K & Roth for 2016, but in subsequent years have found myself in a similar situation as the author.

    What I’ve done is wait until the year is nearly over or weigh my income expectations based on employment agreement so I can make the best decision for which type of retirement plan contribution to make. Low income year, Roth is better. High income year, use pretax account to reduce current taxes and preserve ACA subsidy. If income is really low, consider a Roth conversion so you can reduce those pretax accounts before the dreaded RMDs kick in.

    A well timed Roth conversion can also help bring your income up so you qualify for the ACA subsidy in years where your income is too low.

    • That is a great approach, with one caveat: the very end of the year may be too late to open a new solo 401(k) account, so open it earlier in the year (by September if possible), and then make your choices about withdrawals, conversions, savings, etc., at the end when you know your full tax picture.

  19. Wow, I loved everything about this post and learned so much just reading the comments! Yes, I love the idea of being able to continue to pad my retirement nest egg even after I stop working full-time. My husband constantly bugs me to retire, but I want to work a little longer to catch up our retirement savings. Once I retire, I see no problem with picking up a little side work or getting involved in a project that generates some income. Thanks for sharing your situation!

  20. I’m way late to the party on this post, but I was surprised by the shade thrown at the SEP IRA here:

    “SIMPLE IRA or SEP — SIMPLE IRA and SEP plans are other tax-advantaged retirement saving options for small businesses and sole proprietors, but they’re so much more complicated to set up and require filing many more tax forms than solo 401(k)s that they aren’t worth seriously considering.”

    SEP IRAs are not complicated at all unless you have other employees. They are no more difficult to open and manage than a traditional IRA Like a traditional IRA, they can be opened up and funded until the tax filing deadline for the previous year’s return (unlike solo 401k which as you noted needs to be open by the end of the tax year for which you’re contributing). The downside for businesses with other employees is the same percentage contribution must be made for all eligible employees. However, for sole proprietors with no employees that is obviously irrelevant.

    The solo 401(k) has the advantage of potential higher contributions due to “employee” contributions which aren’t available in a SEP IRA. For my situation in 2018, I had substantial W-2 income and had already maxed out my 401(k) contributions in my employer’s plan. Then I left and became a consultant late in the year and will have some meaningful 1099 income. Since I’ve already maxed my 401(k) contributions for the year, a solo 401(k) would offer no advantage over a SEP for me in terms of maximum contributions. So I opened a SEP for 2018 rather than bother with the more cumbersome solo 401(k) opening process. I may consider a solo 401(k) for 2019 if I end up not having W-2 income and employer-sponsored 401(k).

  21. I’m also late to the comment party, reading some old posts. But wanted to pass on info on SEPP and SEP IRAs.

    First on SEP IRAs, as Loach said they are easy. We set ones up for my wife and myself 3.5 years ago. I don’t know of any extra tax forms, though I might have had to put something into TurboTax the first year. About the only complexity for us is that it’s one more account, and I haven’t yet rolled them over to our normal IRA or Roth accounts.

    Both IRAs and Roth IRAs allow SEPPs, substantially equal payment plans, to be set up for people under the normal withdrawl age. Basically it is exactly what a RE person wants, setting up a consistent withdrawl method to avoid that 10% early withdrawl fee. It’s been years since I’ve looked deep into the details, but basically you use one of a few life expectancy tables, and then set up the plan. You can read about this in the IRS publications specific to IRAs and Roths. Other retirement accounts have this too, either directly or functionally via a rollover to an IRA or Roth.