3 Ways Freelancers Can Start Planning For Retirement

17 March 2017
 Categories: , Blog


There are a number of good reasons to go into business as a self-employed contractor or freelancer. You get to be your own boss, do something that you love, and set your own hours and policies. More and more Americans are choosing the freelance life, and experts estimate that as much as 40% of the US workforce will be made up of freelancers by 2020. But there's one big problem for many freelance workers: retirement. According to an Ameritrade survey, 28% of self-employed workers aren't saving for retirement at all, and another 40% save for retirement only occasionally. Many freelancers don't really know how to plan for retirement, and most retirement advice is geared toward employees not freelancers. If you're a freelancer, take a look at some tips that can help you get started planning a retirement.

Start With The Basics

If you're one of the self-employed workers that isn't saving anything at all, now is the time to start. Before you begin worrying about 401(k)s and IRAs, you need to be building some type of emergency savings. Open a basic, no-frills savings account, and start training yourself to put at least some money away every time you get paid. Even if it's not much, it's better than nothing.

Contend With Variable Income

One of the major barriers freelancers face when saving for anything, including retirement, is the fact that their income can vary from week to week, month to month, and year to year. What happens if you commit to putting away $1000 a month for retirement, but one month you only make $1500?

One solution is to focus on percentages instead of dollars. If you commit to saving 10% of your income, for example, you'd put away $10 out of every $100, $100 out of every $1000, or $1000 out of every $10,000.

Understand Your Options

While you may not have heard of them, there are several good retirement plan options for people who are self-employed. The benefit of using investment plans like 401(k)s and IRAs, instead of just a simple savings account, is that they allow you to put money away for retirement pre-tax, which reduces your taxable income, and therefore your tax burden, while allowing you to save. Since self-employed workers pay more in taxes, this is important.

There are at least four retirement plan options for you to consider. If you're a married sole proprietor with no employees, a solo 401(k) might be right for you – you can add your spouse to the plan as well. Another good option for self-employed workers with no employees or only a few employees is the Simplified Employee Pension (SEP IRA), which is easy to set up and requires no reporting to the IRS. If you run a business with employees, you may want to consider a Savings Incentive Match Plan for Employees (SIMPLE IRA), which is an easy plan designed for small businesses with fewer than 100 employees. If you're a high earner and you want to put away large amounts of money, then a defined benefit plan can let you put away a lot of money each year. That may be important if you're getting close to retirement age but have no real retirement savings yet.

For freelance workers, it's especially important to consult a financial advisor about retirement strategies even if you're not making a lot of money. A financial advisor can help you audit your budget and look for ways that you can save more for retirement, as well as advise you about retirement plans that suit your financial situation. Look for a financial advisor that is experienced with freelance workers and understands their unique needs, such as one from a company like Wealth Mechanix.