Managing money as a freelancer is already a struggle, am I right? Add retirement planning to the mix and you probably feel like you're in for some trouble.
Let's face it; retirement planning is one of the areas that freelancers tend to fall behind. While it's never too late to start planning for retirement, the sooner you do the better. Making sure you're taking steps to put yourself in a positive financial situation later in life is not only responsible, but it's also necessary.
Best of all, it doesn't have to be scary!
This article will offer some easy (and actionable) tips freelancers can use to start planning for retirement so you can feel more in control of your financial future.
But before we dive in…
I just want to make it clear that I am not a financial expert. The tips provided in this article are strategies that have worked for me. For tips and strategies tailored to your unique financial situation and goals, please contact a financial advisor.
With that disclaimer out of the way, let's get to it!
Types of Retirement Accounts for Freelancers
First things first — if you don't have a retirement account, you need to open ASAP. While you don't have access to a traditional 401(k) through an employer, there are other options.
1. Individual Retirement Account (IRA)
An IRA is a great option if you're just starting out and are still in the side hustle stage rather than freelancing full-time.
Even if you have an employer-backed retirement account, an additional account to your retirement planning can't hurt. Look into either a traditional or Roth IRA to boost your freelance retirement savings.
2. Solo 401(k) Plan
The other option is investing in a Solo 401(k) plan. Also known as a One Participant 401(k) plan, this retirement account is reserved for self-employed individuals or small businesses with no full-time employees.
The downside is that you don't get that nice little employer match like you would with a 401(k) offered through a typical 9-5 job.
The good news?
You can contribute up to $57,000 or 25% of your net self-employment income (whichever is less) per year. If you're 50 or older, you can also add an extra $6,000 per year in “catch up” contributions.
3 Ways Freelancers Can Save for Retirement
Retirement planning for freelancers can be tricky and maybe even a little overwhelming, but it doesn't have to be. The following three tips will offer some guidance on how to save for retirement as a freelancer.
1. Keep Track of Previous 401(k)s
Have 401(k)s from previous jobs? Don't abandon them!
If the balance exceeds $5,000, you can leave them in their existing accounts as long as you're satisfied with the fees and investment options. If you have more than one 401(k), consider combining them in a single IRA. There won't be any tax consequences and they'll be much easier to manage since the funds are all in one place.
2. Learn How to Invest
In addition to opening a retirement account, consider learning to invest on your own. Even small investments made now have the potential to grow exponentially over the years.
If you're new to investing, I suggest checking out an app like Acorns.
Acorns makes it super simple to invest on your own by investing your spare change. It's kind of like a set it and forget it way of investing money.
Here's how it works:
- Sign up for an Acorns account.
- Link your bank account and any debit or credit cards you want to use to fund your investment account.
- Answer a series of investor questions.
- Take a short quiz about your life and goals so Acorns can help you find the right portfolio.
- Accept the recommend portfolio or choose a different one.
Once your account is set up, Acorns will round up your purchase made using your linked accounts to the nearest dollar. Once your roundups reach $5, Acorns will transfer the money to your portfolio.
You can also contribute extra money at any time or set up recurring deposits. There are many different features to take advantage of to help you boost your contributions too.
If you feel more comfortable managing an investment account on your own, you could look into an option like Foreign Exchange (Forex) trading. It's supposed to be pretty flexible and user-friendly, and you can get started with as little as $100.
3. Contribute Often
Saving for retirement is definitely less challenging when you work a traditional job. Retirement contributions are made automatically, so there are no extra steps to be taken on your part.
But on the other side of the spectrum…
Freelancers are 100% responsible for keeping up with their retirement contributions. The easiest way to stay on top of retirement planning as a freelancer is to set aside money every time a client pays an invoice. The more you do it, the more automatic it will become.
That said, don't contribute more than you can afford or you'll end up in some financial trouble. Just make sure that you contribute to your retirement savings on a regular basis, even if it’s only a small amount.
A really great tool that I've been loving for retirement planning is Catch.
With Catch, you can automatically set aside a percentage of your freelance income for things like retirement, taxes, health coverage, and more. Set up is easy thanks to a guided process that helps you build your plan.
Catch will recommend percentages to set aside for retirement and whatever benefits you want to contribute to. Then you'll link the bank account for your business. Every time a deposit is made, Catch will notify you so you can distribute your chosen percentages to the appropriate accounts.
You can set up rules to disburse funds automatically or you can do it manually. If you decide you don't want to contribute to one or all of your benefits from a particular deposit, you can skip it. You can also change the percentages at any time.
Catch truly makes retirement planning (and taxes) for freelancers a breeze!
When it comes to saving for retirement as a freelancer, it's up to you to be proactive. Take some time to think about your current money habits, existing retirement planning strategies, and goals for retirement.
Figure out where your savings needs to be at in order to retirement when you want. Then do your best to maintain your contributions to get there.
I hope you found these retirement planning tips for freelancers and the self-employed helpful! Be sure to check out this guide for more tips on managing money as a freelancer.