How To Save Money For Retirement: Guide For Freelancers

Saving for retirement. Just about anyone can tell you how important it is to do this. But it isn’t easy to actually do that, especially if you’re a freelancer or running a small agency.

If you work for someone else, it’s easier. As long as your employer has an employer-sponsored plan, all you have to do is contribute on a regular basis. It’s taken out of your paycheck and you don’t have to think about it much, except for a periodic check-up on the performance of your holdings.

But if you work for yourself? Different story. You have to:

  • Set up your own plan
  • Figure out how much you can contribute
  • Estimate how that will impact your taxes
  • Choose from seemingly millions of different investing options

It stressed me out just writing that!

But here’s the good news – even if you work for yourself, you can comfortably retire just like anyone at a 9-5. You just need to learn the basics and find a rhythm. Then it’s just a matter of regularly contributing to your fund.

In this guide, I’ll talk about some of your retirement plan options. Then I’ll talk about how you can decide how much to contribute, how it will impact your taxes, and what your investment options look like.

Bear in mind, I’m not a financial advisor and I can’t tell you how to spend your money. But I can at least save you some endless Googling and help you understand your options!

Quick Note: As with my other posts, my assumption in writing this is that you’re in the US, running a freelance or small agency operation. You’re probably a sole proprietor or single-member LLC. Some of this post will still apply even if you do not meet these criteria, but the retirement plan options will not.

5 Retirement Plan Options For Freelancers & Small Agency Owners

Freelancers and small agency owners have a lot of retirement plan options. Before you open any kind of retirement plan, you need to really research the details and make sure it’s a good fit for you. Every plan type has its unique benefits, drawbacks, and quirks, and no one knows your financial situation like you.

Bearing that in mind, here are five options that you should be thinking about.

Option #1: SEP IRA

A Simplified Employee Pension (SEP) IRA allows freelancers and small business owners to make tax-deductible contributions. Personally, I really like this plan, since – for me – it fulfills the same function that my old employer’s 401(k) used to.

Pros:

  • You can contribute a lot of money.
  • They’re easy to set up.
  • Contributions are tax-deductible.

Cons:

  • Contributions must be uniform for all eligible employees.
  • You cannot have catch-up contributions for those over 50.
  • Your investment options are limited compared to other plans.

Option #2: Roth IRA

When you open a Roth IRA, you can make after-tax contributions. That means you can withdraw at any time without being taxed. Personally, I like plans that allow me to contribute and deduct from my taxable income, but I am definitely a fan of having a Roth IRA alongside another kind of plan like a SEP IRA.

Pros:

  • You can withdraw tax-free at any time.
  • There are no required minimum distributions (RMDs).

Cons:

  • If you make too much money, you cannot contribute to a Roth IRA.
  • The contribution limits are lower compared to other plans.
  • Contributions are not tax-deductible.

Option #3: Traditional IRA

Traditional IRAs are another way you can make tax-deductible contributions, with taxes paid upon withdrawal in retirement. 

Pros:

  • Your contributions are tax-deductible.
  • You have a wide range of investment options.
  • Any funds you contribute will reduce your taxable income.

Cons:

  • Taxes are paid on withdrawals.
  • Required minimum distributions (RMDs) begin at age 72.
  • The contribution limits are low compared to other plans.

Option #4: SIMPLE IRA

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is designed for small businesses with up to 100 employees. This is a good way to have a retirement plan that feels like a 401(k) but is easier to administer.

Pros:

  • They are easy to set up and administer.
  • Employer contributions are mandatory and tax-deductible.
  • Contribution limits are higher than Traditional and Roth IRAs.

Cons:

  • Employer contributions are mandatory.
  • Contribution limits are lower than SEP IRAs and Solo 401(k)s.
  • Early withdrawal penalties can be high.

Option #5: Solo 401(k)

A Solo 401(k) is designed for self-employed individuals and business owners with no employees.

Pros:

  • The contribution limits are high.
  • You can make contributions into your Solo 401(k) as both the plan contributor and as the employer.
  • You are able to take loans out of your Solo 401(k).

Cons:

  • It’s more complex to set up and administer.
  • Annual filing requirements with the IRS once plan assets exceed $250,000.
  • This is also limited to business owners with no employees (excluding a spouse).

How Much Should You Save For Retirement?

Once you figure out what kind of retirement plan you should use, the next big hurdle is figuring out how much you should save. This, of course, is a very personal subject and you have to make a judgment call.

But if you want to figure out what you can afford to save up, here are some tips to help you do that:

  1. Track and categorize expenses: Categorize your expenses into essentials, discretionary spending, and savings. This will help you understand where your money goes and identify areas for potential savings.
  2. Know your income, expenses, and debts: Document your income sources, monthly expenses, and outstanding debts. This information will help you plan your savings strategy.
  3. Create a realistic budget: Develop a budget that aligns with your income and expenses. Ensure it includes a dedicated portion for retirement savings. Sticking to this budget will help you stay on track.
  4. Set specific goals: Define your retirement goals, such as the age you wish to retire and the lifestyle you desire. Use retirement calculators to estimate how much you need to save to achieve these goals.

This may seem like a lot of pre-work to do. But since you are responsible for creating your own financial statements and you don’t have something as clear cut as a salary, you can’t skip this step. This is especially true if you plan to contribute to funds where you will be penalized for early withdrawals.

How Does Saving For Retirement Affect Taxes?

One of the biggest benefits of saving for retirement is that it can reduce your taxable income. Granted, this is not true for every kind of retirement plan, but it is for most plans that have high contribution limits.

Accounts like Traditional IRAs, Roth IRAs, SEP IRAs, and Solo 401(k)s offer various tax benefits. For example, Roth IRA contributions are made with after-tax dollars, but qualified withdrawals are tax-free.

Likewise, contributions to Traditional IRAs and SEP IRAs are tax-deductible, reducing your taxable income for the year. As a logical outcome of that, you end up paying a lot less tax in general.

When saving up for retirement and planning around taxes, the number one question you want to ask before you put money into any given fund is:

Do I think I will need to withdraw this money before retirement age?

Choose your retirement plan(s) accordingly.

How To Invest Your Retirement Funds

When it comes to investing retirement funds, the most important thing you can do is just be consistent. Set up automatic transfers so you don’t have to manually save up for retirement. You want to use “out of sight, out of mind” to your advantage.

But beyond this simple tip, how you choose to invest your retirement funds is very personal and subjective. So here are a few things to consider.

Basics of investing

If you’ve never invested in retirement before, it’s a good idea to brush up on concepts like risk and return and asset allocation.

In general, the riskier an investment is, the higher the return is likely to be. Low-risk investments don’t get huge returns, but you seldom have to worry about them not panning out. The opposite is also true. (Though it should be noted – nothing is guaranteed!)

There are all kinds of different forms of investments – stocks, bonds, real estate, and so on. What you want to do is allocate your assets in a way where it lines up with the amount of risk you are willing to take.

If you’re young and you have a lot of career years left, you can likely live with more risk. But if you’re nearing retirement age, you will likely want to play it safe.

Diversify your investments

You don’t want all your eggs in one basket. You want to have your investments spread against different asset classes like stocks, bonds, and other types of investment. And within each of those, you want to have all kinds of different stocks and all kinds of different bonds.

You could manually choose every stock and bond that you want to buy. But you can also choose index funds, which are made up of hundreds or thousands of stocks and bonds, allocated in different ways around the amount of risk you’re willing to tolerate.

Keep an eye on your investments

The good thing about retirement funds is that you don’t have to monitor them that often. Indeed, looking too often can make it tempting for nervous investors to act impulsively. You want to take the long view.

Even still, it’s a good idea to check your fund performance every month or so to make sure it’s in line with reasonable expectations. If your funds are underperforming your expectations, it might be time to rebalance your investments. You might also want to keep an eye on management fees, which can dip into your returns.

Personally, I am a fan of Vanguard Admiral Shares because they have low expense ratios. (But, of course, don’t do anything solely because I name-dropped it in a post. Remember, I’m just a small business owner myself trying to give you high-level info!)

Talk to an expert if you feel confused

Retirement is complicated and you don’t have to figure it out alone. If you’re unsure about investment strategies, talk to a financial advisor. They can give you personalized guidance that no blog post possibly could. And that can help you develop a comprehensive investment plan that works for you.

Final Thoughts

Saving for retirement as a freelancer or small agency owner isn’t as straightforward as it is with a 9-5 job. You have to pick your own retirement plan, estimate how much to contribute to it, figure out the tax implications, and decide how to invest.

To put it lightly, that is a lot!

And yet, just like with a traditional job, you can save up for old age. You can achieve financial security. It just takes slightly different methods to get there.

Once you figure out the rules, you will find that being your own retirement administrator gives you a lot of freedom. And that’s a great feeling!

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