Retirement Planning From a Freelancer’s Viewpoint
In a way, most freelancers have it lucky. I know several in their sixties who are still happily working — and even one graphic designer in his seventies who moonlights teaching Photoshop. Despite being able to easily work long after the age commonly associated with retirement, though, most freelancers don’t intend to spend their golden years at their computer. That means that at least some basic retirement planning is necessary: even if you’ve been paying into Social Security for years now, it’s not going to cover your full cost of retiring.
Retirement Planning: Where To Start?
Freelancers have some unusual needs when it comes to planning for retirement. Our expenses — like health insurance — can look entirely different from the average employed individual that a financial planner might see. To make matters more complicated, most retirement accounts, like 401(k)s, were created with employees — or at least people with fairly consistent income — in mind. So, where should a freelancer start when trying to figure out a plan for retirement?
Jeremy Vohwinkle, a Chartered Retirement Planning Counselor, actually suggests that you start with a relatively simple step: “It’s true, there are a lot of different types of accounts and investment choices out there, so trying to get a handle on everything at first can be a daunting task. Just to start, a freelancer should at least begin setting money aside for retirement. At this point, it isn’t important to get bogged down with understanding all the different account types or investment strategies. Instead, it’s important to simply get into the habit of setting aside a portion of your income for retirement.” If your income varies significantly, Jeremy suggests saving a percentage of your income rather than a set amount each month.
Jeremy’s approach has a number of advantages for a freelancer. Beyond building up the habit of setting aside money, perhaps into a separate savings account, you’ll rapidly get an idea of how much you can save on top of your usual expenses. You’ll also be building up an initial balance, which can be required to open certain investment accounts.
Moving to a Retirement Account
Once you’re comfortable saving regularly, it’s time to kick your retirement planning up a notch. If you feel comfortable with your options, that might mean something as simple as opening an individual retirement account with your bank. Because of the wide variety of IRA options, though, it may be worthwhile to find a financial planner who can help you decide on the best over all retirement plan. No matter where you live, a financial planner can help you make the best choices regarding your retirement accounts — especially when you’re looking at options created by the government, that may or may not offer you tax advantages, such as a superannuation fund in Australia or an IRA in the United States.
Many financial planners have made freelancers a specialty: while they may not advertise as such, as you’re considering financial planners in your area, make a point to ask if they’ve worked with many freelancers or small businesses in the past. While a ‘no’ may not be a deal breaker, a ‘yes’ can indicate that a financial planner can do a much better job for you.
It’s important to remember that even if you have a great financial planner, you’re ultimately responsible for your own retirement. Jeremy is self-employed and he says:
I have to always remind myself that my retirement rests on my own shoulders. I’m not going to go to the office every day for 30 years and be able to draw a pension. And when it comes to Social Security, it’s hard to say what that will turn out to be, but even if it does pay what it’s supposed to, it will hardly keep the lights on in retirement. What I do today will have a direct impact on what kind of life I’ll be living in 30 years. This is the same message I try and stress to other freelancers. The ball is in your court, so make the most of it. The sooner you get started and begin taking advantage of some of the benefits of being self-employed, the better off you’ll be. Especially for younger people, I know it’s a tall order to sit down and think about your life decades down the road. But as hard as it is, time is either your greatest asset or your worst enemy. Act sooner rather than later so that time is on your side.
Making Up For the Company Match
When it comes to retirement, there are some drawbacks to being self-employed. You won’t be getting profit sharing, pensions or a 401(k) match from an employer — and that can make a difference in how much you need to save up in order to retire in the manner you’re expecting. If you’re planning to entirely quit working on your 65th birthday, that can mean that you’ll need to put away a lot more than you might expect.
Before you get too worried about that idea, though, it’s worth considering just what you want your retirement to look like. If you enjoy your work, are you going to be willing to work on at least a few projects and take a semi-retirement? Thinking about questions like this, as well as other facets of your planned retirement can give you a clearer picture of just how much you’ll need to save up in the years to come.
And in the words of Dave Ramsey: Live like no one else (today), so later you can live like no one else.
Great post and awesome tips! Thanks
I always though the best retirement plan for a freelancer is to create enough passive income so he, or she does not have to work more than a 80 year old person could do from their bed without having a heart attack
I think there is some great practical advice here.
But! Once you’ve freelanced for a couple of years, you should seriously think about growing your work and owning a business and revenue source, rather than simply owning your dayjob. For lets face it, as being a freelancer, even a well paid one sucks compared to owning a business that earns money whilst you sleep, and that you could potentially sell.
Wonderful post! I must admit, I haven’t even been thinking about retirement – but as you said, all freelancers should. I agree with Smashill: the best retirement plan is passive income. Unfortunately, freelancers often still have an “employment” mentality of trading hours for dollars. Come on, freelancers, let’s create multiple streams of passive income! What do you say?
Thanks for posting this article, Thursday!
One lesson that history teaches us is that it’s important to be cautious of what our savings are invested in and to ensure that any advisement that we receive is actually worthwhile. In the interest of preserving our remaining and future assets, it all comes down to doing the research ourselves, especially before electing a financial planner.
I love the post, very insightful again. If I may though, beside creating streams of passive incomes, there’s a company based in Atlanta that shows you how to make systematic transfers and manage it to create what they call your path for financial freedom. Check it out, it helped me for sure:
http://www.mywealthskills.com/workshops.html#
Cheers!
I come from a family of retirement refuseniks. My grandfather kept working as a securities analyst until he was too ill to go to the office. (He had cancer.) My father is still working as a chemical engineering consultant/researcher and inventor. He’s 84, and we just had a family/business discussion yesterday.
So, the idea of retirement planning is something that doesn’t really ring with me.
OTOH, the idea of passive income is very appealing. My father’s patent royalties have done all sorts of nice things for the family. And he’s not finished inventing yet.
I’m also interested in parlaying the business experience I’ve gained from freelancing into other things. Yeah, I know. “Other things” sounds pretty vague. But I have to be that way right now, as I’m working on one of them.
One of the best options available is a SEP IRA. You can put away roughly 20% of you income pre-tax up to 40k. It is in many respects a better deal than the employer sponsored 401k.
Great info. Thanks again!
I guess there are different types of people who freelance and people have different goals. I know plenty of people who have great businesses on their own but just like the idea of working on their own. I often look at them and wonder why they don’t just hire a couple of people and take it easier but I guess it just comes from the enjoyment of working on their own.
I’m planning to die at my desk. Working. From home.
Nice article….
Do freelancer have a retirement?
Interesting blog. I for one am desperate to leave freelancing after years and years of not knowing where next month’s pay will come from. I’ve survived, had a few good runs, but I’m fed up with the financial insecurity and personal isolation of the freelance life. I enjoyed the freedom and mocked corporate slaves whose life experiences were pitiable compared to mine, but in the end who the hell wants to be a freelancer over age 40 or 50? It’s a game of diminishing returns.
I like the author’s point on how a freelancer can be able to gain enough money upon retirement. Since the income is not definite, it is right to save a certain percentage of his/her monthly income. That way, it will benefit both his/her present and future. He won’t be able to suffer at present. Likewise, he can have some money after he or she retired.