Do you have a retirement plan in place as a freelancer? Have you thought about putting money away, but don’t know where to start?
Whether you have a small part-time income or earn a generous living working from home it is possible to prepare for your future just as you would as an employee of a company. The only difference is you are your own boss and can make the final decision in how much to put away each month.
According to an article on CNBC four out of 10 people who are self employed do not have a retirement account such as a 401(k) or an IRA. And 40 percent aren’t saving anything!
So why are we as freelancers (me included) missing the mark when it comes to planning for our golden years? The article points out several reasons according to a study by Small Business Majority:
- We don’t make enough income
- Our paychecks are unpredictable
- We rely on our spouses’s plan instead
- The plans cost too much
- Fear of government tied savings plans
- Limited options
- We’re choosing to pay for healthcare instead (or do we really have a choice?)
- Not enough time
Yikes! That’s a real wake-up call. Before we know it we’re 65 years old wondering where all the time and money went. The good news is that you can begin today to do something to help secure your future. Here’s some good advice I dug up along the way in researching for this article that I believe will help all of us:
1 – Set aside a little each month
Even if your income is up and down without any real predictable numbers you can still come up with a budget that allows you to save toward your retirement. Start with what you can do and increase that a amount little by little in order to create at a least 6 months of savings that cover all of your living expenses. This might mean trimming some of what is coming out of your current budget like too many trips to the coffee shop or buying new when you could be getting used items instead. Find a way to creatively save money if your income does not currently support building a savings.
2 – Create your own investments
Talk to your CPA about how your business can be marketable later as a sale or investigate whether purchasing rental property would be a good option. Other ways to do this are with vacation rentals, investing in precious metals like gold and silver, or purchasing a existing company that has good profitability.
3 – Purchase a 401(k) for solopreneurs or individuals
The IRS explains exactly what a traditional plan looks like for freelancers, which is called a one-participant 401(k) plan. This is specifically for sole proprietors and business owners who do not have any employees, and includes the same rules as a traditional plan.
4 – Invest in alternative retirement plans
If your income has increased considerably then you might want to consider more flexible options such as a Simplified Employee Pension (SEP) plan, which is available whether you are solo or have employees and can include up to 25 percent of your pay. Looking for deductions? Then you can take a look at either a traditional IRA or Roth IRA. Both have tax benefits and allow a generous contribution. For a full list of other types of retirement plans take a look at what the IRS has listed here.
5 – Set up a separate business account
Eliminate the temptation to tap into your earnings by creating a separate business account, which could also include a savings account to pay your taxes. It’s fairly simple to do, and is available to individual freelancers as well as small business owners. You’ll find that at the end of the year your taxes will be much easier to calculate as all of your expenses and deductions will be in one place.
Planning for retirement is just as important as securing your first paying client. Without this we are just living paycheck to paycheck without a backup plan for emergencies and moving out of the work force. As always talk to a good accountant about which option best suits your current budget and business needs before making a final decision.