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There are so many incredible benefits to freelancing, among them, working when you want, where you want, (hopefully) on projects you enjoy. But when it comes to certain areas of personal finance, I have to admit that I really do miss my W-2 job. Saving for retirement is one of those areas.
Employers Make Saving for Retirement Easy
When you work for an employer, they generally ask you when you start if you want to contribute to retirement, then they take it out of your paycheck, and you don’t need to worry about a thing. It is way harder to be saving for retirement as a freelancer due to the sheer barriers to establishing an account and getting money into it regularly.
But there are options. And just because you’re sticking it to the man by leaving the corporate world behind, that doesn’t mean you won’t want to step away from the game completely one day. As your own boss, it’s on your shoulders, and yours alone, to make sure you’re planning for retirement as a freelancer.
Creating a Plan
Before you drop a dime into any retirement account, you’ll want to create a plan that takes into account your current and projected income, the lifestyle you want in retirement, and any other potential income sources you’ll have at that time. Below are a few great questions to ask yourself before developing your plan.
- How much do I currently make per month?
- Do I foresee my income increasing over the next few years? (We all hope so!)
- What is my current monthly spending?
- Do I anticipate my expenses in retirement being higher or lower than they are now?
- Will I have any additional income streams when I want to retire? (Social Security, rental property income, investment income, etc.)
- What can I reasonably afford to begin setting aside for retirement today?
It’s best to work with a professional to create a truly comprehensive retirement plan as they can ask all the right questions. There are expenses in retirement that many people don’t consider, such as medical insurance and leaving a legacy. Financial advisors can help to see your blind spots, which I know personally as a new freelancer, I’ve had many. (What up estimated quarterly taxes.)
What Retirement Accounts are Available to Freelancers?
At a traditional employer, an employee may have access to a 401(k), 403(b), or 457. Freelancers have access to self-employed retirement accounts that we need to set up ourselves.
- Individual 401(k): This is the option I have and for a few reasons. It allows you to contribute as the employee (up to $19,500 in 2021) and the employer (up to 25% of earnings in 2021 with a limit of $58,000). Now granted, I don’t foresee myself being able to max this out for quite a while, but it’s appealing to have these high limits for if/when my income increases. I also like that this plan offers a Roth option for post-tax deferrals. This plan requires an income and no full-time employees, except yourself, a spouse, or a business partner.
- Individual or Roth IRA: This type of retirement account isn’t tied to your employer, and as long as you have taxable income, you can contribute up to $6,000 in 2021 (or $7,000 if you’re over 50). I make it a point to max out my Roth IRA every year so that I can bank on tax-free growth for years to come.
Small Business Retirement Plans
The below two plans are more for small businesses that want to offer retirement plans. So if you have, or are thinking of having, employees that help with your freelance business, one of these could be a nice option to offer.
- SEP IRA: The Simplified Employee Pension (SEP) plan is solely funded by the employer. It can be offered to employees of a small business who are at least 21, received a minimum of $650 in compensation during the year, and have been employed three of the last five years. Since it’s solely employer-funded as a percentage of compensation or
- SIMPLE IRA: The Savings Incentive Match Plan for Employees (SIMPLE) account allows employer and employee contributions, but they are all pre-tax. As the employer, you need to decide if you want to match the employee contribution up to 3% or give a set contribution amount, even for employees who choose not to participate.
** It’s advisable to work with a CPA or tax attorney if you operate a small business and want to offer one of these options to your employees.
How Do I Set Up a Retirement Account?
The first step in setting up your retirement accounts is to choose a brokerage. My favorites are Vanguard (the one I use), Fidelity, and Schwab, but there are tons of others out there, and you’ll want to do your own research before committing to one. Make sure to check for accounts that are free to open and don’t charge transaction fees.
After you choose your brokerage, there will likely be paperwork (yes, real, physical paper) to complete and mail to the firm of your choice. Some transactions may be available online, but I’ve still needed to snail mail a thing or two in my experience.
Tips to Make Retirement Saving Less Painful
Saving for retirement, or even thinking about getting older, is something many people are subconsciously putting off. When I think about planning for retirement, it forces me to think about my own mortality. And that can be kind of uncomfortable.
But I’ve come to the conclusion that time continues to tick, and whether I want to or not, I will one day be of an age where I may want to retire. So whether I start planning today or 20 years from now is up to me. But one of those options puts future me in a much better position.
Anything you start to save or plan for today is going to make it easier on future you. It also means that you might be able to move away from the freelance grind (if you want) earlier than you might without saving.
A Little Bit is Better Than Nothing
In my first month as a freelancer, I made a whopping $215.31. And the following months weren’t too much better. It took around 6 months until I was making $2000 per month or more consistently. So I fully understand how it feels to barely make enough to pay the bills, let alone be able to set aside extra for savings.
But even if you can only do $5 a week right now, the little bit you can do is incredibly valuable. The sooner you start saving, the more time your money has to grow. And at $10 a week, in 5 years, you could have $2,600 plus growth saved. It might not seem like much. But it’s still a step in the right direction. And seeing that balance grow may encourage you to increase contributions over time.
Balance is King
Retirement savings and planning are all about striking a balance between living the life you want today and making sure the future you will be set up for success. Most of us freelancers are already living the life we want, and we must express gratitude for that and recognize that we are incredibly fortunate in a lot of ways.
But planning for your life down the line is so incredibly important. If you can get spending and savings in order, you can truly have your freelance cake (freedom, flexibility, incredible work) and eat it too (financial security down the road). I know the younger generations can sometimes get caught up in the YOLO lifestyle where you need to do things today because tomorrow isn’t promised.
And I get that. Every single day we’re blessed with is precious, and we need to be grateful. But we can’t wholly neglect retirement planning and the fact that we’re all getting older. It’s difficult to retire at a reasonable age when you YOLO’d away all the money you made over your freelance career on bar tabs, Amazon orders, and vacations.
Plan for it Even Though you LOVE your Job
Most people who decide to freelance are doing things they enjoy. I like to write about personal finance and do the occasional QA job. It feels like something I can do for a long time to come. But just because I’m not itching to step away from this job doesn’t mean I’m using it as an excuse not to plan.
Even people who love what they do might one day want the flexibility to do it less and pursue other passions. You don’t set yourself up for financial flexibility because you don’t love what you do, it’s because you love yourself.
The Main Thing About Retirement Planning for Freelancers
You need to think about it and get started. There are options, and if you need help, there are resources. Nobody but you is looking out for your future. So live for today, but be sure to plan for tomorrow, too.
Have questions about what I’m doing to plan for retirement or want me to cover another related topic? Drop me a comment and let me know.
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Disclaimer: The above is my own opinion and is for informational purposes only. Views expressed above are not intended to be investment advice. While I might have some great ideas, seek a duly licensed professional for investment advice.