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If you’re working the gig economy as a freelancer or contractor you’re probably missing out on a lot of the benefits employees take for granted, including an employer managed retirement savings plan.
In fact, Forbes recently reported that 77% of freelancers claimed they would rely on their own savings (as opposed to a pension plan) to fund their retirement and that 30% predicted that they would never retire.
There are, however, plenty of options for freelancers to save into (fairly) traditional retirement plans. If you’re one of the 73 million+ freelancers currently operating in the USA, here are some steps you can take to help create a retirement plan that works for you.
Assess Where You Are
Where are you in terms of retirement savings? You may or may not have been paying into a traditional retirement plan, but maybe you’ve saved and invested your money in other ways. Maybe you don’t have a cent in retirement savings — or any other savings — and you really are starting from scratch.
Take a look at your net worth and the other important numbers we should all be aware of. Gather together the details of any pension plans you’ve paid into in the past, perhaps when you were working as an employee. And gather together any other details that are relevant to your retirement plans, such as health or long-term care insurance policies, so you can get a more complete picture of what you might need. Whatever you decide going forward it’s good to know where you’re starting from.
Decide What You’d Like Retirement to Look Like for You
If you’re a location independent freelancer who loves their work, then maybe ‘retirement’ will look very different for you than it will for many people. Maybe you’ll continue to work for as long as you possibly can, and maybe you’ll be one of those freelancers who (willingly, rather than through necessity) never really retire. Perhaps you’ll travel or live abroad in retirement but continue to generate a healthy income.
Knowing how you want retirement to be like will help you plan for it, but remember that plans can be easily derailed in later life by health issues, bereavements and other unexpected circumstances. So have some contingency plans in place as well.
Open a Retirement Savings Account
As a freelancer, you’ll be missing out on any matched contributions your traditionally employed friends benefit from, but that doesn’t mean you can’t open a traditional retirement savings account. An IRA will often be a suitable way of saving for retirement if you’re a long-term freelance worker.
If you have a 401(k) from a previous employer, you can roll over the money in that into an IRA. If you’re starting from scratch, consider a Roth IRA which often comes with no minimum limit and means you can start paying in even if you only have very small amounts to invest at this point.
Many freelancers go with a Roth IRA due to the tax implications. If your income – and tax burden – is fairly low right now you may not feel the need of the tax benefits of an IRA. A Roth IRA allows you to contribute post-tax income now, but means you’ll be able to draw that money tax-free in retirement.
Other options include a solo 401(k) which has various tax advantages (but is a little more complicated to set up than simply opening an IRA), or a Simplified Employee Pension (SEP) IRA, which is similar to a traditional IRA, but is aimed at sole business owners without employees.
As is always the case, there will be individual circumstances that might make one option better for you than any of the others. If in doubt, you’ll definitely want to consult a financial planner who specializes in helping freelancers.
Wherever you are in your freelance journey, and whether or not you feel freelancing will be a permanent career choice for you, it’s never too early to think about what your ideal retirement will involve, and how you’ll finance it.
Karen Banes is a freelance writer specializing in entrepreneurship, parenting and lifestyle. She writes articles, website content, ebooks and the occasional award winning short story. Her work has appeared in a range of publications both online and off, including The Washington Post, Life Info Magazine, Transitions Abroad, Brave New Traveler, Natural Parenting Group, and Copia Magazine. Learn More About Karen
To make Wealthtender free for readers, we earn money from advertisers, including financial professionals and firms that pay to be featured. This creates a conflict of interest when we favor their promotion over others. Read our editorial policy and terms of service to learn more. Wealthtender is not a client of these financial services providers.
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