How freelancers can save up for retirement

Yes, freelancers, you can save for retirement, too!

If you’re a freelancer working in the much-discussed “gig economy”, I don’t need to sell you on the perks: You’re your own boss. You set your own hours. Your commute sometimes takes 10 seconds. (Hello, laptop.) I also don’t need to tell you about the challenges: You have to nag that client for the third time to pay you for a project you finished months ago. Your closest colleague is your pet goldfish. And when it comes to writing your paycheck, putting aside money for taxes, or socking money away for retirement, well, it’s all on you.

A 2017 survey by the Small Business Majority, an advocacy group, found that four out of 10 freelancers don’t have an active retirement plan. Even among those who do, as other research has found, savings may be sporadic. Only about a third of the self-employed regularly save for retirement. Yet as your own boss, saving for retirement is about the best thing you can do for your sole employee. (You!)

I know this may sound daunting. You likely don’t have access to a 401(k), and there’s no helpful HR person to walk you through any savings plans. If your pay is erratic, it’s hard to feel comfortable putting any money somewhere you can’t get at it easily. Plus, there’s just the hassle of it all—you’d rather send that deadbeat client a thousand more invoices than deal with this. But it’s important for your future happiness, not to mention your current peace of mind. So, in the immortal words of a former president: “Yes we can!” Here’s how:

Open an account

As you may know, IRA stands for “individual retirement account,” and it’s the most popular way for freelancers to save for retirement. The great thing is that, unlike a 401(k), an IRA doesn’t come through a company you work for. You set it up yourself. I recommend doing this through a low-cost mutual fund company such as Vanguard. You can contribute up to $6,000 a year to an IRA. There are two kinds: Roth IRAs (which offer completely tax-free growth) and deductible traditional IRAs (which offer an up-front tax break and then years of tax-deferred growth).

If you are feeling more ambitious, you should check out some other retirement savings options for self-employed people, including SIMPLE IRAs (which let you contribute up to $13,500 a year in 2021); simplified employee pensions, or SEP-IRAs (which let you contribute up to $58,000 total in 2021, depending on your income); and solo 401(k)s (which are a hybrid of traditional 401(k)s and SEP-IRAs). The rules and the paperwork for these accounts can get complex, so I recommend spending a little of your hard-earned money to consult an accountant if you decide to explore these options. For lots more info about choosing the right IRA, as well as details on other retirement accounts for people who are self-employed, see Chapter 6 of my book Get a Financial Life.

Choose easy, low-cost investments

You don’t just put money into an investment account. You have to choose investments to put that money in. The financial institution where you have your IRA will walk you through this. But it is important to make sure you choose investments that aren’t going to charge you expensive fees. Just makes sense, right? Two good ways to do this are through low-cost ETFs (exchange-traded funds) and stock index funds. I’m not going to go into a lot of detail on these investments, but you can read all about it—and get recommendations from me—in Chapter 5 of, you guessed it, Get a Financial Life.

Always pay yourself first

If your income is relatively stable, I recommend setting up automatic deductions from your checking or savings to an IRA once or twice a month. “Set it and forget it” is the way to go. If it helps, start small—say $25 or $50 every couple of weeks—but know that you need to ramp this up to save enough for retirement. I recommend that, at the least, you contribute the annual $6,000 limit for IRAs. If you get paychecks sporadically, commit to putting either a set amount—or, better yet, a set percentage of it—in your retirement account every time you get paid. If you worked at a company and had a 401(k), you would have to choose a percentage of your salary to come off the top of each paycheck. So do the same now: Put, say, 6% of every check you get into your retirement account before you start to pay any other bills. If that sounds crazy to you, consider that this is exactly how a 401(k) would work: If you received a check from your employer, the money would already be gone. Why not be just as good to yourself as Corporate America would be?

At first, contributing to a retirement account may be painful, but after a while it will become habit. And every time you make that deposit into your IRA and see your balance grow, it’ll feel good. Go ahead and buy yourself one of those cheesy “World’s Best Boss” Mugs. You’ve earned it.

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