From an insane amount of flexibility to the ability to pick and choose exactly what projects you work on, making a living as a freelancer comes with its fair share of perks.
But, as with anything, for every upside there’s a downside. Taking vacations can be a challenge, your income tends to be more erratic, and—oh, yeah—there’s also no employer matching for your retirement plan.
These factors can make it all too easy to completely neglect saving for retirement altogether. But, unless you’re part of the small percentage of freelancers who plan to work until they drop dead, you’re going to need a decent nest egg to rely on when you reach that stage of life when you want to do nothing but golf, travel, and eat dinner at 4 p.m..
So, what do you need to know to proactively and effectively save for retirement when you’re living the freelance life? We’ve got the lowdown on some best practices.
Start now (yes, now!)
With the income rollercoaster ride that’s notorious with freelancing, it’s easy to push your retirement savings to the backburner. However, that’s a dangerous trap.
About 75 percent of Americans over age 40 are behind on saving for retirement, and that’s not a club you should be eager to join. So, it’s important that you make your retirement savings a priority now (yes, right now!).
“You want to eat when you’re old, right?” says Jonathan Medows, CPA and Founder of CPA For Freelancers, “You’re going to need that money when you’re older, and that time sneaks up quicker than you think.”
Yes, your retirement might seem like a way distant point on the horizon. But, to rely on an old cliché, life is short. The sooner you can start saving, the better!
The sooner you can start saving, the better! Click To Tweet
Know your options Now comes another big question: How do you go about saving for retirement?
“There are numerous different types of plans self-employed individuals can open,” explains Noa Rodriguez-Hoffman, CFP and Founder of Socialyte Capital, a financial planning firm focused on digital influencers.
Here are a few different retirement plan options you can consider:
- SEP IRA
- Traditional or Roth IRA
- Solo 401(k)
- SIMPLE IRA
- Defined Benefit Plan
These various plans have different pros, cons, requirements, and contribution limits. So, do your research (or sit down with an expert!) to choose the one that best suits your needs and your retirement goals.
Because of the erratic cash flow that comes along with freelancing for a living, adequate budgeting and planning is essential for not only ensuring you can keep your lights on—but also that you’ll be able to tuck some pennies away for retirement.
“Careful budgeting is extremely important for those who are self-employed,” Rodriguez-Hoffman shares, “Be sure to spend time forecasting not only how much you’ll earn, but also when you will receive the income.”
Rodriguez-Hoffman recommends sitting down to create a month-by-month projection that nets out expected expenses against expected income. That will help you identify any gaps, keep cash flow in reserves to cover slow months, and also figure out a realistic amount to contribute to your retirement account.
As far as how much you should be aiming to contribute? The more, the better. But, many financial experts recommend that you save at least 10 to 15 percent of your income for retirement, starting in your twenties.
Save at least 10 to 15 percent of your income for retirement, starting in your twenties. Click To Tweet
Set monthly targets
Saving for retirement can feel completely overwhelming. You need such a massive amount of money for a goal that still feels so far off, and that can be discouraging at best. You’d rather spend that chunk of change on something you can benefit from right now, rather than ensuring that you can enjoy that early bird special 40 years from now.
This is why it’s better if you can break that big retirement goal down into smaller, more manageable pieces.
“It’s easier if you try to do things monthly or quarterly,” Medows explains, “Have monthly or quarterly goals for what you should save. Breaking it down into smaller milestones will help keep you focused.”
After you’ve taken care of your budgeting and forecasting (see how helpful that above step was?), you can take a look at how much you should plan to set aside each month or quarter.
Even if you can’t move that money directly into your retirement account immediately (oftentimes those contributions are made during tax time!), you can set it aside in a separate savings account for now. That way, you know you have it!
Ask for help
No matter how much research you do or how much information you get under your belt, saving for retirement can still feel challenging—particularly for those of us who don’t consider ourselves “numbers people.”
But, never underestimate the value of reaching out for some help. “Ask parents, grandparents, friends, or call up the bigger investment companies to get recommendations from them,” suggests Medows.
And, of course, if you feel like you could benefit from having a true expert in your corner, get connected with a CPA or CFP who can help you make decisions about how to save for your retirement.
Rather than sitting down with the first person you find, do some digging to identify someone who would be the best match for you and your financial goals. “If you’re not conservative, having someone who is conservative investing for you might not be the best fit,” Medows adds.
Saving for retirement is one of those things that’s far too easy to push to the backburner—particularly when you’re trying to make ends meet as a freelancer. However, you definitely don’t want to end up in the same camp as that 45 percent of Americans who don’t have any retirement savings at all (yikes, right?).
So, use these tips to map out a plan for yourself and start saving right now. Even if you don’t have the financial flexibility to dump heaps of cash into your retirement account, every little bit helps! And, the sooner you start, the better off you’ll be.
Got any retirement tips for freelancers? Drop them in the comments below!