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Saving for Retirement as a Freelancer

We’ve covered the basics of how small business owners should plan on saving for retirement in an earlier post. But, what do you do if you are a freelancer?

In many senses, preparing for retirement as a freelancer is similar to planning for retirement as a small business owner. However, as a freelancer, one of the biggest problems you can face is managing an irregular income. This can be a barrier when it comes to retirement savings. below, we’ve compiled a few financial tips for freelancers, to help you save for retirement!

Retirement Savings Options for Freelancers

First, let’s review your retirement savings options. As a freelancer, you may be surprised to find out that you have many. As a freelancer, your best retirement bets are: a SIMPLE IRA, a solo 401(K) or a Simplified Employee Pension (SEP) plan.

Perhaps one of the biggest challenges freelancers are up against isn’t saving; rather, it’s saving enough to fund retirement. You should start by setting aside 10-20{bc669dfb3651bb8509a96034cbe7494d3a811fc0eedf0ddccb239fb9cb737439} of your income into a retirement fund. We recommend that freelancers start by opening an IRA or Roth account and adding up to $5,500 (the traditional limit for these accounts).

If you are still away from retirement, a Roth account is going to be your best option. Since your taxes on your contributions will not be deferred. This means that you will not be penalized because you have already paid the taxes on them. We don’t recommend an IRA account to most freelancers, because you see a tax break on contributions. But, you have to pay the taxes when you withdraw your funds, which could spell financial trouble. Think of a Roth account as an emergency stash; you shouldn’t touch it until retirement, but it’s there is you need it.

The downside to a Roth account are its income limits; specifically, you cannot contribute if your gross income is $129,000 or above. If you expect to contribute more than the $5,500 limit toward your Roth account, you should also consider utilizing another retirement savings option, such as an SEP account or a Solo 401(k). An SEP is a great option for freelancers looking to contribute more money in addition to their Roth accounts, as you avoid taxes on an SEP. This means you will only be paying immediate taxes on your Roth contributions, rather than both accounts.

Emergencies and Financial Hardships

The life of a freelancer is not always financially stable like it is for full-time employees. Occasionally, you may find yourself in a situation in which your clients dry up or work is unavailable.

This is why it is important for freelancers to set aside additional savings for times of financial hardship. Ideally, these savings would be between three and six month’s necessary living expenses. The savings can be for rent, groceries, utilities, and transportation payments.

Any more than that should be invested, as a traditional savings account earns very little interest. It is always best to keep six month’s worth of savings in a place where you can easily access it. Don’t forget to keep your spouse or partner’s finances in mind. You may need to save more or less depending on your financial situation.

The good news about freelancers is that job loss is rare. Most freelancers have a few sources of income and aren’t at risk of losing their total income.

Additionally, you should be setting aside a separate portion of your income – around $1500 or $2000 – for any unexpected financial emergencies that are not part of “necessary living expenses”. You can make this separation easier by opening a savings account that will let you divide your money separately or by opening a second savings account.

As a freelancer, you should also consider starting a passive income stream. This is revenue you continue to earn on a project or product after it is complete. This could include website building or writing a book. Passive income is important to freelancers because it means you may not have to concentrate on building such a large retirement fund. There are many ways to create passive income, as well – all you have to do is commit energy and time.

Bottom Line

Freelancers have more options than they think when it comes to saving an adequate retirement fund. It may take some time and a little financial savvy, but it is possible for a freelancer to save just as much for retirement as a full-time employee would be able to.

Remember: budget, consider investing in multiple retirement accounts, always have an emergency fund on plan and create a smart passive income. By following those steps, you’ll quickly see your retirement funds grow!