Freelancer’s Guide: Save for Retirement, Pick a Plan, Invest

If the words “retirement planning” make you break out in a cold sweat, you’re not alone. A report released by the National Institute on Retirement Security released in September 2018 found that 57 percent (more than 100 million) of Americans of working age don’t have a retirement account. 

As a freelancer, retirement planning can be made even harder by the irregular nature of work and payments, and the lack of employer-match programs that incentivize saving for your 9-5 counterparts. When no one’s offering you free money, retirement planning can take a backseat to just keeping your life running.

But even though it might seem easy to put it off for another year (or 10), do your future self a favor and make it a goal to get in the driver’s seat and take control of your finances this year. Because even if you love your freelance writing or design career today, you may not love it as much (or be able to keep up the hustle) when you’re 70 or 80.

So take a deep breath, and read on for our simple tips on how to start saving for retirement and all the basics you need to know about the types of retirement plans open to freelancers, plus how to invest your money. (Overwhelmed already? Bookmark this post and tackle it one step at a time.)

How to start saving for retirement as a freelancer in 3 simple steps

Let’s cover the “how” first, because you’re going to need to have some money to set aside before you choose what type of retirement account you want.

1. Track your spending

Before you can save you need to understand where your money is going. Use a program like Mint, Personal Capital, or You Need a Budget to track your spending for at least 30 days.

2. Identify spending weaknesses & places you can save

Really take a look at where you’re putting your money and how it aligns with your values. Is eating out at restaurants more important than your retirement? Do you have a weakness for new clothes you can’t really afford? Do you shell out 80 bucks every time you step foot into a Whole Foods?

3. Age your money & automate savings

The goal with budgeting is to get to a point where you’re spending money that’s been in your account for 30 days or longer. When you’re not spending money as soon as it comes in, you have much more control over your financial life. This is especially useful for freelancers with variable income.

Once you’ve got a good plan going and you’re not stuck living paycheck-to-paycheck, come up with a reasonable goal of how much you can put aside for retirement each month. If it works better for you, you can also choose a percentage of each payment that you’ll put aside. (Hint: It’s a good idea to do that for your taxes, too).

Then set it, and forget it. If money has a tendency to burn a hole in your pocket, put the funds for your taxes and retirement in a separate bank account without a debit card.

Should You Pay Off Debt Before Saving for Retirement?

In general, as a freelancer, you’re not missing out on any employer matches for retirement, so it’s best to pay off high interest debt before putting money towards retirement. If you’re deep in debt, read more about how to balance paying it off with saving for retirement. 

Retirement Plan Options for Freelancers

You’ve got your money working for you, your high interest debt paid off, and money to set aside for retirement. Congrats! Now you need to choose the type of account you’re going to put it in. (Scared of investing? Read up on why you should invest vs. keeping this money in a savings account.)

The Most Basic Plans: A Traditional or Roth IRA

• Good if you’re: Just getting started with retirement planning, saving $5,500 a year or less.
• Contribution Limit: $5,500 for tax year 2018 ($6,500 if you’re over 50)

What’s the difference?

With a traditional IRA, you can save your money before taxes (i.e. you get a tax deduction), but you’ll pay income tax on your withdrawals when you reach retirement age. With a Roth IRA you pay taxes now, but your withdrawals in retirement will be tax free.

When in doubt, choose a Roth IRA

Unless you know for a fact that your tax rate will be lower in retirement than it is now (which can be really hard to determine, unless you have access to a time traveling DeLorean or a reliable crystal ball), the Roth IRA offers a couple distinct benefits for freelancers over the Traditional IRA:

• While it’s not a good idea to pull money out of a retirement account early, the penalties with a Roth aren’t as steep and strict as they are on a Traditional IRA. So if you’re worried about locking up your money and then having a dip in your freelance income, the Roth gives you a lot more flexibility and peace of mind.
• When you do hit retirement age, the Roth has fewer rules and restrictions. If you’re still happily working away at age 70 or 71, there’s no required minimum distribution with a Roth, unless you inherited the account.

Getting More Advanced: The Solo 401K & SEP IRA

• Good if you’re: Having an amazing year and raking in the dough as a solo freelancer.

• Contribution Limit – Solo 401K: Up to $55,000 for tax year 2018 ($61,000 if you’re over 50) or 100% of earned income, whichever is less.

• Contribution Limit – SEP IRA: Up to $55,000 for tax year 2018 or 25% of your net self-employment earnings, whichever is less.

If there are years when you’re making six figures or more freelancing, you can use a Solo 401K or SEP IRA to stash away more retirement savings than you can with a Traditional or Roth IRA.

How do they work?

The solo 401K is just like a traditional employer run 401K plan, except you’re both the employer and the employee so you can make contributions as an employee, and then match them as your own employer.

With the SEP IRA, you contribute a percentage of your net earnings. If you have employees, you have to contribute the same percentage for every employee.

Which should I choose?

If you’re earning the big bucks, hire an accountant to help you decide and make sure you’re maximizing your savings and tax deductions, but here’s the short story on pros and cons of these plans.

The Solo 401K typically has the highest contribution limit for big earners. It also offers a tempting loophole where although you can’t have employees, you can hire your spouse, and it allows for higher contributions over age 50, but it has more maintenance/reporting and typically costs a bit more to set up. If you’re married, and/or over 50, and earning six figures, definitely look into it.

With the SEP IRA, you can have employees (including a spouse) as long as annual contributions are equal for all employees, but contribution limits are set regardless of your age. A SEP is typically cheaper to set up, requires less paperwork, and no annual reporting to the IRS, so if you’re young and not married, it might be an easier option.

How to Invest the Money in Your Account

Current financial wisdom says that you should invest your money in low-fee, market index funds. (Need more convincing? It’s the same advice the U.S.’s most famous investor, Warren Buffet, gives.)

Market index funds follow the whole stock market, vs. actively managed funds, where a fund manager tries to earn more by selecting a specific mix of stocks. Actively managed funds come with higher fees, and studies by S&P Dow Jones have shown that over 10 years, more than 80% of fund managers failed to outperform index funds. 

So if investing isn’t your area of expertise, and you want a no-brainer strategy, stick with index funds.

The best part of getting control over your financial life? You have more choices. Whether you want to travel abroad for a season while you work, make the leap to the full digital nomad lifestyle, or just take a vacation, you’ll have the peace of mind to do it when you take finances off your list of worries.

Disclaimer: We’re fellow freelancers, and these are the strategies we use for our own retirement saving, but we aren’t trained financial advisors. Truly taking control of your finances means doing thorough research and consulting your accountant to confirm you’re acting in your best long-term interest.