Kevin O’Neil of Rafalko Advisors Inc., who runs the website RetirementPlanning.Guru, said that self-employed workers like freelancers need more discipline than employees of companies with sponsored retirement plans. Not only do freelancers need to determine how much they should be saving, O’Neil said, but also they need to decide which plan works best.
“Freelancers need to take advantage of the stabilized economy to earn as much as they can and save as much as they can while the going is good,” he told me.
O’Neil recommends freelancers talk to a certified financial planner about which retirement plan is best their individual circumstances. However, one option is the SEP IRA, which stands for Simplified Employee Pension Individual Retirement Account. Although SEP IRAs are typically used by business owners with at least one employee, these plans can also work for anyone with a freelance income.
Other freelancers may find the Solo 401(k) to be the most attractive option. Also known as a Self Employed 401(k) or Individual 401(k), a Solo 401(k) is a qualified retirement plan designed primarily for employers with no full-time employees other than the business owner and their spouse.
Finally, another popular option for freelancers is the Roth IRA, a special retirement account where you pay taxes on money going into your account, but all future withdrawals are tax-free. According to the Roth IRA website, these retirement plans make the most sense for people who expect their tax rate to be higher during retirement than it is now. “That makes Roth IRAs ideal savings vehicles for young, lower-income workers who won’t miss the upfront tax deduction and who will benefit from decades of tax-free, compounded growth,” the website notes.
Freelancers should also talk to a financial planner about the idea of creating a mechanism to provide them income when the economy takes a downturn and they’re not yet ready to retire — but they still have bills to pay. “I just presented this general message to a group of realtors who are now in the ‘profit’ phase of the real estate cycle, telling them, ‘Now is the time to put money away for both short-term and long-term income needs,’” O’Neil said. “The importance of planning has never been greater. The government is telling us that they will continue to dilute the entitlements — Social Security, Medicare, pensions, etc. The responsibility for retirement preparation now rests primarily with each individual American worker.”
Another advisor told me that when the good times come, and incomes rise, freelancers shouldn’t lose focus on savings. Michael E. Kitces, a certified financial planner and publisher of the financial planning industry blog Nerd’s Eye View, cautions that an increase in freelance income is not an invitation to spend more money. “As your income picks up, beware of the ‘lifestyle creep’ of buying new things that make your lifestyle permanently more expensive, now and in the future,” he told me. “It’s fun to spend a little of your newfound earnings, but try to spend just 50% of your new income for yourself, and commit the rest to regular savings.”
Although the economy is slowly improving, economists note that, statistically, we’re likely to enter another recession in the next few years. Things aren’t perfect right now, but conditions are markedly better than they were a few years ago. Freelancers should use this relatively stable time wisely.
For more information, check out the following retirement planning calculators: