Retirement for Freelancers
March 5, 2019
Thinking about retirement for freelancers is like solving an equation that has four unknown variables and only one constant. Questions start racing through your head: how much do I need to save? And then, shortly after using a calculator that gives you a number, how will I ever save enough to retire?
Depending on your age, it may seem too far away to worry about it just yet; or so close that you are beginning to push out your retirement age. As a self-employed person, it’s even more important that you actively save for retirement because you don’t have ready access to a 401(k) account through a traditional employer.
Here is a small sample of some of those variables that play into retirement:
- marital status
- life expectancy
- cost of living
- amount already saved
When income is variable as well, it’s easy to start wondering, “will I ever retire?”.
While there are many factors out of your control, there are many steps you can take now to set yourself up for success, and not all of those steps start and end with saving.
Decide what “retirement” looks like for you …
Or, perhaps, if you will ever fully retire. While some of you may have visions of retiring in your 50s or 60s and traveling the world in your RV, others may not plan to “retire” in the traditional sense. So many freelancers already have come up with their own mix of work/life balance outside of the traditional 9 to 5 job. Many have realized what Dr. Laura Carstensen, Director of the Stanford Center on Longevity, puts this way: “If we now know that we have an extra two decades of life to live…why do we put all the leisure, freedom, rest, time with family at the end?”
Given this, it’s not surprising that some freelancers don’t plan to stop working. Instead they plan to scale back. However, it still makes sense to plan for a time when you can no longer work, especially as health care costs continue to rise. It is projected that the average couple will need $280,000 for healthcare expenses in retirement, in today’s dollars only.
If you see yourself retiring or even just scaling back, you’ll need to understand how much it will cost for you to live the life you want to live. Your monthly living expenses or maybe even your annual retirement “salary” will be important first number for you to understand.
So, what kind of life do you want? Is it road-tripping in an airstream? World travel? Hanging out at your beach condo? Staying near your grandkids and watching them grow up?
The key here isn’t to get turned around in the specifics of it all. If you make $75,000 annually today, is that how much you expect or want to be making annually when you retire or scale back? Have a number in your head of what you want to be “making” when you retire, as that is how much you might withdraw from your retirement account annually.
Decide when you want to retire or project how long you’ll keep working
Often referred to as your retirement age, this number is important in two ways. First, it tells you how much time you have to actively save before you retire, and it gives you some sense of how long you will be retired.
While there is no crystal ball that can tell you how long you’ll be retired, you can make an estimation of your life expectancy in retirement so you know how many years you need those savings to last.
There is no “right age” to retire. In the past it was common to retire around age 65. Partial Social Security benefits can pay out as early as age 62, and full benefits are available at age 66 for those born before 1955, and it will gradually raise to age 67 for those born after 1960. Depending on your retirement plan, it may not allow withdrawals without penalty until after age 59 ½ and some plans require minimum withdrawals after age 70 ½. Also, you may find there are many advantages to delaying Social Security withdrawals.
But many people retire earlier or much later than the numbers above, by choice. As a solopreneur, you have a real opportunity to decide when and how you want to retire.
By the way, this isn’t a fixed number. It’s just a starting point to help you get started in the planning process. Market fluctuations, inflation, your goals—all of it impacts what will actually happen.
Back to your retirement savings goal
Ok, now you have enough information to use a handy retirement calculator, like this one from Fidelity. Calculators will help you incorporate things like inflation and look at other factors too, like what you might already have saved.
Looking at what you’ll need to retire on as a lump sum may seem like a massive amount of money. It can be crippling to see what you need to retire, sending you back to the question of whether or not you ever will retire.
Saving now, even in small amounts, can make a huge impact. Retirement is a LONG play, and the money in your retirement accounts can continue to accrue interest and value once you retire.
Open a retirement account
Ok, you are here. Retirement account opening time. There are different options available, and while you may not be able to access corporate employee benefits like matching contributions, you may get higher tax advantaged contribution limits than those who work in salaried employment and your contributions may greatly help reduce your taxable income when filing your annual taxes.
Pro tip: You can contribute to your IRA for 2018 up to April 15, 2019 or April 17, 2019 if you live in Maine or Massachusetts. Traditional IRA contributions may be deductible for certain taxpayers.
Also note, if you worked for an employer the previous year, you may be able to rollover your 401K into an IRA. bSolo does not provide investment advice or recommendations. Please consult a financial expert to determine the best option for your situation.
|Traditional IRA||Up to $6,000 in 2019 or $5,500 for 2018, optional $1,000 catch-up contribution if age 50 or older||-Potential tax deductions on annual contributions-May rollover your 401K from your previous job||-Withdrawals during retirement will be taxed-Potential penalties for early withdrawals|
|Roth IRA||Same as Traditional IRA||-Withdrawals during retirement may be tax-free-Allows you to withdraw contributions, but not earnings, tax free and penalty free anytime||-You may be able to rollover your 401K from your employer if it was also a Roth IRA but most 401Ks from employers are traditional by default-No immediate tax deductions-Has an income limitation|
|SEP IRA||Up to $56,000 in 2019 ($55,000 in 2018) or up to 25% of your net earnings, whichever is less||-Contributions are tax deductible-Limited paperwork-Annual contributions not required||-Withdrawals in retirement are taxed-Has a $280,000 limit on compensation-No catch-up contribution available|
|Solo 401k||Up to $56,000 in 2019 or 100% of earned income, whichever is less. Optional catch-up contribution up to $6,000 if age 50 or older||-May appeal to those who can and want to save a lot of money for some years and less for others||-Requires filing paperwork to the IRS each year if you have more than $250,000 in your account-Can be a bit complicated to maintain|
|Simple IRA||Up to $13,000 in 2019 ($12,500 for 2018), optional catch-up contribution up to $3,000 if age 50 or older||-Contributions are tax deductible||-Withdrawals in retirement are taxed-Requires heavy paperwork-Early withdrawals are taxed as income with 25% penalty during the first two years (including rollovers) and 10% after that|
Understand your business
Let’s pause for a moment and consider the context of right now. As a freelancer, it’s not always easy to save for retirement; especially during those months when you are living paycheck to paycheck.
In theory, as a freelancer, you also have unlimited earning potential. You can set your own prices and work as much as you want. That said, we can all agree that self-employed life is financially complicated sometimes and it’s not always rainbows and unicorns. So how do you get started on the actual saving part?
First, consider your business itself. There are many ways in which you can max out your earnings and save a little more.
On the “earn more” side, you’ll want to make sure you’re not lowballing yourself and that you’re pricing yourself right.
One the “save a little more” side, one advantage you have working for yourself is being able to take deductions on your business expenses (like home office, cellphone expenses, mileage, etc). Make sure you’re saving your receipts throughout the year. These deductions will help you decrease your taxable income, potentially leaving you more room for contributions to your retirement savings.
Other considerations: if you’re fairly established, you may want to consider launching an LLC or an S Corp. It may take some time and money to set up, but you may find the benefits worth it. Both separate you as the owner and employee of your business to offer you better liability protection.
There are also other rules when it comes to paying yourself a salary and paying taxes as an LLC or S Corp; some of which can be advantageous. This can be complicated so please consult your favorite accountant or business planning attorney before proceeding. If you will be consulting an accountant or using one to file, the good news is you may be able to deduct and save on those fees.
The time to do something is now, even if it means just setting aside 1% of what you earn this year. Try to make it a game and pay yourself first: can you increase your contribution by .25% each month?
Although the freelance community is growing every day, only 8% of our community is regularly contributing to retirement accounts, as compared to 45% of the traditional workforce.
You may love being a freelancer and may not see yourself retiring. Or you may feel that you’ll never be able to retire. If you’re the latter, why is that? Do you need to raise your rates? Save more and spend less? See if you can’t up your contributions when you get extra money or after raising your rates. You may want to consult a financial professional if you just can’t figure it out. If you’re the former, what if you change your mind? If you start planning and saving now, even if you decide to keep working into retirement, having extra cushion can’t hurt. Like every aspect of self-employment, planning for it, especially retirement, can make a big difference in the end.
What if bSolo could help you save for a retirement as a freelancer, in a way that makes sense for your financial life? We’re noodling on some ideas around that, so if you are interested, sign up to learn more.
This article is being provided for informational purposes only and should not be viewed as a recommendation of any product, service or strategy referenced.