How To Plan For Your Retirement As A Freelancer

Guest Author | Feb. 26, 2019, 2:51 p.m.


A survey by KellyOCG in 2015, 15 million Indians were working as freelancers, coming second from the U.S. which was 53 million at that time. 

The National Institute on Retirement Security released a study that showed almost 40 million working-age households in the U.S. have no retirement savings. This is not different globally. Freelancers particularly need to watch out and plan on retirement. Unlike employed people who have double retirement savings on the 401(k) plans since companies also put away some employee savings too, freelancers only get to save without any help from anybody.

 How exactly do you save for retirement as a freelancer?

When planning for retirement, the first thing you need to do is know how much you can afford to set aside. Budgeting your income should help you know how much you can save. It’s advisable to save around 20% of your income. However, this percentage is not cast on stone because different households have different expenses. There are some factors to consider when saving for retirement.

1. Income

Your income should be the first consideration of retirement saving. Add up all your monthly income and deduct the expenses and decide how much to save with the balance. As a freelancer, you know that income is never constant because you may have two clients this month and the next time have like five. Work with an average monthly income. The best is working with 20% of the income.

2. Age 

If I’d tell people in their early 20s something is to start saving for retirement as early as now. Why? Because when you are young, you don’t have as many responsibilities as somebody in their 40s. The earlier you begin to save the better because it will be over a more extended period which makes the payment schedules flexible. 

The benefit of being a freelancer is you can always choose when to retire. You can even retire at 40!

3. Your Targeted Retirement income

 The retirement income you want to get once you retired should be a driving force to help you know how much to save. 

If need be, you can get a financial adviser who will help you come up with other investment options to help increase your cash flow which will help increase the amount of retirement savings you tuck away.  
A financial adviser will be able to help you identify viable options to help your money grow. They will be able to help you understand what is an option? What investment trends are currently sustainable? Apart from advising you on investments, the finance adviser should help you to choose the best retirement plan. In the U.S. there are different plans available: 

1. IRA [individual retirement account]
We have two types of IRA plans
●    Traditional IRA
●     Roth IRA

Traditional IRA

This is a retirement account that allows people to direct their income before tax towards investments.  The saving limit for the 2019 tax year is $6,000 for people below the age of 50 and $7,000 for those above 50. If you intend to withdraw the funds before 59.5years, a 10% penalty is charged. There are situations when the penalty is waived like when withdrawing to purchase a first time home. 

Roth IRA

If you expect your retirement taxes to be higher after retirement, then Roth IRA is best. Here, you pay taxes on any money going into your retirement account. This way, you don’t pay taxes after retirement. You can withdraw money any time you want with no penalty. 
You can only contribute earned income for the year in the year you make your contribution. 

2. Solo 401k plan

This plan is for the self-employed people and their spouses. Here, you have a provision to fund your plan from both your business income and your personal compensation. The advantage of going for this plan is any investment gains along the way won’t be taxed, and you are free to reinvest the earnings. 
Once you retire, your withdrawals will be taxed.

3. HSA plan

It is a health saving account which helps in supplementing the retirement account. It helps in catering to healthcare expenses. If you are an HSA holder, you can choose to save a maximum of $3,500 for an individual and $7,000 for a family. However, for people above 55 years old, they save an extra $1,000 for each.  The contributions are 100% tax deductible from gross income.

Preparing for retirement is crucial because a time will come when you can no longer work. You don’t want to be a burden to your kids when that time comes. Invest early and retire early and let your money work for you. Choose a strategy that will work for you without straining and leading you into debt. 

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