Saving for retirement can be a daunting task in the best of scenarios — you know, when you have a steady, full-time job with a 401k and a generous employer match program. Let's be clear: That's the best scenario. When you're a freelancer, piecing your income together one assignment at a time, saving for anything, let alone the Big Faraway Future, can seem almost impossible.
But it's not. It's not impossible, and more than that, it's important. Here are some basics to keep in mind when it comes to saving for your Golden Years during your freelancing/barely getting by years.
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Yes, right now. As soon as you finish reading this article, start saving for retirement. Procrastination is never a good habit, but when it comes to saving for retirement, it can be absolutely crippling. CNN Money explains the reasoning perfectly, using something irrefutable — cold hard numbers. The example CNN uses goes like this: Imagine you start saving for retirement when you're 25 years old and you put away $3,000 per year for 10 years. Then, at 35, you decide saving for retirement just isn't for you anymore and you stop saving completely and just leave the money you've already put away in your retirement account. Assuming a 7% annual return, by the time you retire at 65, you'll have $338,000 saved for retirement. Not bad, right?
Now, imagine instead that you wait until 35 to start saving and save the same amount ($3,000/year) every year until you turn 65 and retire. To be clear, that's 30 years of savings, instead of 10 years like in the first scenario. Except, in this case, the money you put into the same investments with the same 7% annual return only grows to $303,000 by the time you retire. And that, my friends, is the glory (or the suck, if you start late) of compound interest.
So tl;dr: Start saving right this second, because in the retirement savings game, time is almost more important than money. The longer you save, the more you'll end up with, pretty much every single way you slice it.
Know your IRAs.
As a freelancer, you won't have a 401k to invest in. You'll need to save independently in an IRA or hire a financial advisor to manage your investments for you (more on that later). There are several types of retirement savings plans available to you, and NerdWallet has a great chart that breaks down the five types of IRAs, including the basics, pros, and cons of each. But the most common IRAs you're likely to consider are Traditional IRAs and Roth IRAs.
Which plan is best for you depends on your financial situation and personal preference. The plans are similar — both limit contributions to $5,500 per year (until you're 50, when the limit increases to $6,500/year) and both are funded similarly. The major difference is in taxes. For a Traditional IRA, you make contributions pre-tax, meaning you don't pay taxes on the money until you take it out of the account to fund your amazing retirement lifestyle. With a Roth IRA, you contribute post-tax dollars, meaning there's no upfront tax break, but you won't owe taxes on the money when you take it out of the account in retirement. It also means these accounts tend to be more lenient if you need to make an early withdraw (but seriously, don't make an early withdraw).
Also, as a freelancer, you have the option to explore other retirement accounts designated specifically for the self-employed. The IRS breaks down the different plans, but the most common for most freelancers will probably be the SEP (simplified employee pension) IRA. This is a great option if you want to save more than $5,500 per year toward retirement, since SEP IRAs allow you to contribute up to 25% of your taxable income (or $53,000 per year, whichever is less).
Set up automatic contributions.
It's easy to set up automatic contributions to a 401K. The money comes out automatically, pre-tax and, after the first paycheck or two, you barely notice the difference. When you're saving independently, it can be harder to get the motivation to transfer your hard-earned (and not yet taxed) dollars into an account that you can't touch until you're 65.
Linking your checking or savings account to your retirement account (whatever kind you choose) and setting up automatic payments will help. It won't get rid of the sting of watching money leave your account, but it will take away the option to procrastinate investing or spend the money something short-term, like a pair of shoes you don't really need or a new iPhone when you know yours is still great.
Consider hiring a pro.
You can absolutely manage your own retirement savings plan. It's a totally doable thing for normal humans. But, if you know that you're the kind of person who gets a headache looking at numbers or just won't want to deal with the hassle of managing the account yourself, consider outsourcing that work to a financial advisor.
Fee structures vary, from flat rates to a percentage of earnings on your investments, so shop around and find an advisor who meets your needs and whose rates and fee structure you feel comfortable with. You'll have to set up a few initial meetings and/or phone calls to get the ball rolling, but once that's done you can relax a bit. Again, it's not the right choice for everyone and if you're a numbers person (or willing to learn to be one), paying an advisor might not be worth it. If you're the kind of person who might never really get started saving for retirement if you have to go it all alone though, it might be worth paying someone to handle the bulk of the work for you.
Saving for retirement as a freelancer isn't as simple as checking yes on a 401k signup form, but it isn't the nightmare you might fear, either. If you commit to learning about the different plans available to you and picking the one that best suits your needs, you're halfway there. And, as un-fun as putting your dollars away might be now, you'll be thankful you did when you get to retire into the good life.