The landscape of the American workforce has changed dramatically these past few years and now, more and more people are choosing to be ‘solo-preneurs’ (self employed) and freelancers. Approximately 53 million Americans are now part of this independent workforce. And each one of them is faced with this question: how do you plan and save for retirement?
The path to retirement isn’t as clear cut for a freelancer as it is may be for a full-time employee. Retirement planning is no longer the same. There are no company matched 401k’s or pensions plans. So what are your options as a freelancer? Here are ten steps you need to take as a freelancer to prepare a retirement plan financially from the start:
- Diversify your sources of income. As a freelancer, you don’t have the luxury of stability. Be sure to diversify your sources of income so that you aren’t solely relying on one client to make ends meet. You don’t want to get into the situation where you lose your only stream of income but still have bills to pay. The domino effect of this can affect you long-term.
- Set aside 25% for taxes. As a full-time employee, taxes are already taken out for you. When you transition over to becoming a freelancer, you’ll have to do this yourself. As a freelancer, you’ll have to estimate and pay your taxes quarterly. You should roughly set aside 25% of your income for taxes.
- Create a realistic budget. In order to begin saving for retirement, you need to start using a budget. Be realistic but challenging. Especially in your first year of freelancing, you want to spend conservatively to give yourself some breathing room while you build your business.
- Aim to save 20%. When you are creating your budget, aim to save roughly 15-20% of your net income. These savings should go into your emergency fund, investments, and your retirement fund.
- Focus on your debt first. As you save money, focus on paying off your debt first. The longer you let it sit, the more interest you’ll have to pay. Prioritize your payments by paying off your loans with the interest rates first.
- Build a healthy emergency fund. Before you start investing your savings, you need to put aside money for an emergency fund. One event can change your life drastically and you want to be financially prepared for anything. As a freelancer, aim to have 6 months of expenses in your emergency fund.
- Invest in an IRA. One of the most popular retirement accounts to open for a freelancer is a Roth IRA. It’s simple and easy, plus it’s most advantageous if you are young. With a Roth IRA, you pay taxes on what you contribute now. But in retirement, you don’t. Therefore, you can withdraw funds at anytime. This is especially good news if you are young and might need the money later on.
- Consider a SEP IRA. With a Roth IRA comes income limitations. For example, if you are filing as single, your modified adjusted income cannot be more than $129,000. If this is the case, you can consider a SEP-IRA or a Simplified Employee Pension Plan instead. You can contribute either 25% of your income or up to $53,000 for the calendar years 2015 and 2016. The contributions you make are also tax deductible.
- Think about a Solo 401k. Another option you have is a solo 401k. A solo 401k is a good option for business owners who have no employees other than their spouse and themselves. With a solo 401k, you can either opt for a traditional version (your money grows tax deferred) or Roth (your money grows tax-free), much like IRAs. But unlike a SEP IRA, you can take out a loan.
- Start early. No matter what retirement account your choose to invest in, the best piece of advice you can take is to start saving early. Let the power of compound interest and time work for you. The earlier you start saving, the more you’ll see in retirement.
Saving for retirement as a freelancer may be a little more complicated but it’s not impossible. It just requires a little more work on your end.