How to Save for Retirement as a Freelancer

When you’re self-employed, it can be tough to save for retirement.

Most of us actually never consider saving for retirement until we hear about retirement accounts through employer benefits. This depends on if you went to a school that included a basic financial curriculum, which many schools do not.

Without easy access to a 401k through a cushy corporate job, most freelancers have no clue they can still save for retirement on their own through other retirement accounts.

How to Save for Retirement as a Freelancer

When you’re in charge of your own income, there’s no guarantee that you’ll have a steady stream of money coming in each month. This makes it especially challenging for freelancers to set both business goals and financial goals.

It’s an entirely different experience to have a steady income and benefits guaranteed by an employer every month versus freelancing with varying income amounts month to month. You’re in charge of your own income, so there’s no guarantee that you’ll have a steady stream of money coming in each month.

If you’re someone with a lot of past money trauma, this could also be very challenging for you to manage emotionally and makes contributing towards your retirement seem even more out of reach. However, there are a few ways to make sure you’re on track for a comfortable retirement.

Meet The Version of You That’s Already Retired

Visualize yourself as already being retired and then meet them.

It’s not easy to imagine so far ahead in the future, especially if you think you may not be around long enough to retire. How you can start to think about this in the easiest way possible is by looking at your current expenses annually.

What did you spend this past year?

Then, ask yourself what age you’d like to retire. Visualize yourself at this age and then ask them “How will my expenses change at this age?”.

Think about all the different things you will need at this age like healthcare, housing and location, family needs, things you want to do like travel, and anything that comes to mind when you think about what you need now and how those needs will change over time.

Start Saving As Soon As Possible

Another important step is to start saving as early as possible. If you think the time has passed for you to “save as early as possible” because you aren’t in your 20s anymore, think again. You can start saving for retirement at any age and still reach a comfortable retirement.

Even if you can’t save hundreds and thousands of dollars each month, it’s important to get into the habit of saving regularly. This will help ensure that you have enough money saved up when you retire.

If you have just $20 here and there to start contributing, do it anyway and contribute as often as you are able to. Then, slowly increase your contributions as your income increases or your budget allows for it.

The Different Retirement Accounts Available for Freelancers

We all know that one friend who has an amazing 401k benefit through their job with a high match. It might lead you to feel defeated when you see them banking on this amazing benefit while you think you have no way of contributing towards retirement on your own.

There are actually tons of different types of retirement accounts available to freelancers and they all also provide tax benefits.

Some of these accounts include (but are not limited to):

  • Traditional IRA: Individual Retirement Account that is available to anyone with an earned income (W2 or freelance). This contribution is before tax dollars, meaning you’ll pay taxes on it in your retirement when you take it out as income.
  • ROTH IRA: ROTH Individual Retirement Account that is available to anyone with an earned income (W2 or freelance). This contribution would be made with after-tax dollars, meaning you don’t pay taxes on that money when you take it out in your retirement because you’ve already paid taxes on it. However, you can’t deduct these contributions on your taxes.
  • SEP IRA: Simplified Employee Pension Individual Retirement Account which self-employed people can also use and will be able to deduct their contributions for tax benefits.
  • Solo 401k: Similar to a normal 401k in terms of tax benefits. You’re eligible to open a Solo 401(k) if you are self-employed and have no employees.

This also ensures you’re taking advantage of all the tax breaks available to you as a freelancer. Many self-employed people can write off their retirement contributions similar to how they write off health insurance premiums and their business expenses. You can also contribute to more than 1 of the above-listed account types if you wanted to.

Which Type of Retirement Account is Best?

When choosing which one is best for you, it depends on both your income now and what your income will look like in your retirement years.

For instance, Roth IRAs have an income limit of $144,000 to be able to contribute to a Roth IRA if you’re an individual, and $214,000 if you’re married and filing jointly. If you fall within that requirement, I suggest you start here if you think your income in retirement will be higher than it is now. That way, you don’t have any taxes to prepare to pay in your retirement years. If you want that tax break now, go for a traditional IRA, SEP IRA, or Solo 401k.

Both SEP IRA and Solo 401k retirement accounts are for individuals who plan to save a great deal of money for retirement and are looking for those tax breaks on the contributions. You can contribute up to $61,000 a year in both of these, plus a $6,500 catch-up contribution or 100% of earned income for a solo 401k, one of the highest contribution thresholds of retirement account types.

There are Roth versions of solo 401k’s available, but no Roth available for SEP IRAs.

Bottom Line

It doesn’t matter if you don’t have all the specifics of your retirement pinned down yet to effectively plan for everything. The most important part is starting to contribute whatever amount you can and setting up an automatic cadence that these contributions are sent to your account. If your income is unstable month to month, set a minimum amount you know you can send each month to your retirement account regardless of how much you’ll make that month.

However, you must do this in a way that works for you in order to make the process sustainable.

For instance: Let’s say you have a large number of projects in the first half of the year but aren’t sure about what you’ll be making in the second half of the year. Take that income you know is coming in the first half of the year, take a percentage of it that you know won’t be eaten by taxes, bills, paying contractors, etc, and put it towards retirement. If you rather do all of this at once, then do that. If you want to build a habit of it, then divide that up throughout the year.

This will get you in the habit of investing for retirement and promote a stable mindset around investing and your retirement while dealing with unstable monthly income.

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