welcome to joiner services

JOINER News

Retiring Early as a Contract Engineer

The idea that one should start planning early for retirement is often articulated to one another, especially when starting your career. Although most people agree that saving for early retirement is a good idea, there is some resistance to early retirement from engineers who feel they may easily become bored with nothing to do or feel that they have to do something in their spare time.  This article will review two options to early contract engineer retirement, so you have enough money, you’ll never get bored.

contract engineer early retirement planning

Many contract engineers earn a great hourly wage over the course of their careers and usually work countless hours of overtime during a project. Many can easily earn more than six figures a year, and, while earning a larger salary, they can afford to maximize their retirement accounts. 

Two Type of Retirement Accounts:

  1. 401K Retirement Account – This account is for W2 engineering contract employees.
  2. Simplified Employee Pension (SEP) IRA Account – Is for 1099 self-employed engineering contractors.

How Much Can You Save For Retirement?

  1. 401K – Maximum contribution limit of $19,500 (for 2021).
  2. SEP IRA – Maximum contribution limit of $58,000 or up to 25% of the year’s compensation (for 2021).

From the graph shown below, one can easily see why many W2 employed contractors are deciding to leave their employer and become 1099 self-employed contractors.       

Maximum allowable retirement contributions for 1099 & W2 workers:  

early retirement as a contract engineer graph
*Annual investment return = 5%

You are on your way to early retirement as a 1099 worker!

By simply maximizing contributions into the retirement fund, in just 25 years as a 1099 self-employed worker could save over $3 million dollars for retirement in an SEP IRA account, compared to a 40-year career of a W2 employee who would only reach about $2.6 million in savings in a 401K account.

Even if you didn’t start your career as a 1099 self-employed worker, you can transition your career in your 30’s, 40’s or 50’s and boost your retirement funding immediately. If you are interested in a career as a 1099 contract engineer, check out the JOINER Careers to learn more about the becoming self-employed.

What if I cannot afford to maximize my retirement contributions?

Not everyone has the luxury of maximizing their contributions for retirement, so what if you could only contribute half of the maximum allowable? In the graph below, the numbers show a similar savings total but the 1099 self-employed worker has stopped working 15 years prior to the W2 employee.

Half of the allowable retirement contributions for 1099 & W2 workers:

retirement outlook contract engineer vs employee
*Annual investment return – 5%

This time the SEP IRA contributions were only $29,000 a year and the 401K contributions were $9,750 annually. Again, in only a short 25 years, the 1099 self-employed contractor was able to save more ($1.5 million) than the W2 employee ($1.3 million) saved in 40 years.

Do you want to work occasionally while in retirement?

Engineers will often go back into their profession after “retirement” as a contract engineer for temporary assignments.  At this stage in their careers, they can easily pick and choose each project they’d like to work on, as their knowledge and experience is often highly regarded within the industry. These engineers often enter back into the industry as 1099 self-employed workers.  Many find promote themselves on platforms like JOINER Services in order to find new customers and pick certain projects to work on.

What if I can’t retire early, how much should I be saving for retirement?

There is always a certain percentage of workers who opt out of early retirement. This is usually because of the rising costs of health care and the rising costs of insurance. For these employees, the best option may be to wait until they are eligible for Social Security. According to Fidelity Investments, you should save approximately 15% of your income every month for retirement.

I want to get on the path to an early retirement!

If a person is considering that they would like to retire early, then pursuing work as a contract engineer is a great choice.  No matter if you choose to work as a W2 employee or a 1099 self-employed contract engineer, it is important that you find what type of work will interest you the most. While it is often more enjoyable to work on new technologies rather than an older technology, often the older equipment and tools offer more security and the potential for greater earning power because fewer people know how to properly run and maintain the product.

Start saving today so you can pursue your passions.

The choice to retire early as a contract engineer may also be made for financial reasons. Choosing to retire early can be a significant financial decision, but it will also allow the person to use that money to pursue other interests once they are no longer working within their industry.

Key Takeaways:

  1. You can save about 3X more with an SEP account over a 401K.
  2. Becoming a self-employed contractor mid-career can help boost your retirement funds.
  3. After retirement, you have an option to work sparingly on projects as a self-employed contract engineer.
  4. No matter when you decide to retire or how you work to save, make your retirement savings a priority.

Download our FREE pdf to access the top 4 reasons to become a self-employed engineering contractor!

* indicates required