One of the benefits of working for a company is that you receive benefits like paid time off, health insurance, and retirement savings packages.
You may mistakenly believe that freelancers don’t have any benefits. That’s simply not true. Although these benefits may not be built in as part of your employment package, freelancers have many opportunities to build their own customized benefits package, including saving for retirement.
Freelancers set their own rates, which should include the necessary expenditures for things like health insurance that is usually supplemented by an employer. You have to build those benefits into your rates.
As a freelancer, you are a self-employed individual, and there are options you need to consider when thinking about saving for retirement.
How Self-Employed Freelancers Save for Retirement
Freelancers actually have a huge benefit over employees on staff when it comes to retirement. If you are a freelancer without employees, you’re considered a sole proprietor or an LLC. Both options have ways to reduce your taxable income. Always talk to your tax professional to maximize these benefits depending on your tax filing status. (You can also find useful information from the IRS.)
IRA
Another option is to contribute to an individual retirement account (IRA). There are two types of IRAs: Traditional and Roth.
Roth IRA: Your ability to contribute to a Roth IRA depends on how much you earn. For 2023, you can contribute if your modified adjusted gross income (your income minus certain allowable deductions) is less than $153,000 (or $228,000 if you’re married and filing taxes jointly).
The perk of contributing to a Roth IRA is that the money is not taxed when you start withdrawing in retirement. You cannot deduct contributions to a Roth IRA, but you can leave amounts in your Roth IRA as long as you live. A Roth IRA is an IRA that is subject to the rules that apply to a traditional IRA.
Traditional IRA: Anyone can contribute to a traditional IRA regardless of how much you earn. A traditional IRA is a way to save for retirement that gives you tax advantages.
Contributions you make to a traditional IRA may be partially or fully deductible. In general, earnings and gains are not taxed until you take a withdrawal. Traditional IRAs also assume you’re likely making more money now than you will be in retirement. So, you’ll likely be taxed at a lower rate when you begin withdrawing money in retirement.
When Should You Start Saving for Retirement When Freelancing?
Personal finances are really dependent on you and your specific situation. For most freelancers, the first step in saving is to have an emergency fund. You may also decide to contribute to both your emergency fund and retirement simultaneously. After all, the benefits of compound interest are bigger the sooner you get started.
Start With an Emergency Fund
Your emergency fund is largely dependent on your lifestyle as we all have different recurring costs (rent/mortgage, car payment, grocery bills, etc.).
The general guidance says to save anywhere from three to six months’ worth of expenses. Some people may want to save even more—that depends on you and your comfort level and how much you can afford to sock away.
High-yield savings accounts are a great place to save your emergency fund. These savings accounts offer a higher interest rate than normal savings accounts, meaning you earn more interest. And you want your emergency funds easily accessible, so putting them in a savings account makes sense. But you also want to earn as much as possible for that money.
Determine How Much You Want to Save for Retirement Each Month
The earlier you start putting money in a retirement account, the longer it has to grow. Use this compound interest calculator to see just how much room there is for your initial investment to grow!
Don’t hesitate to adjust how much you’re saving each month. Start with one figure and see if you can put away just a little more without feeling the pinch.
Talk to your tax professional about how to contribute a percentage of your pre-tax earnings each month. This figure will largely depend on your earnings and age. If you’re playing retirement catch-up, you’ll want to be more aggressive with your savings.
For example, you may aim for 15% if you’re starting to invest for retirement in your 30s or 25% if you’re starting in your 40s. The freelancer financial life can ebb and flow a bit, so be agile in your contributions to retirement.
Automate Your Retirement Contributions
Choose a figure so that you can automate your contributions. Having this retirement contribution on autopilot ensures you’re consistently saving for retirement. Try automatically depositing money from your business account to a retirement savings account. If you can’t do that, simply add a recurring calendar invite for yourself to make the deposit.
Automation helps with time management and ensures that you’re always saving for retirement even when your monthly freelance income may be lower than usual.
Whether you’re freelancing full-time or as a side hustle, you’ll want to ensure you’re saving for retirement and setting yourself up for success. It’s never too soon—or too late—to get your financial situation in order.
Your Turn!
How are you saving as a freelancer for retirement? Share your tips in the comments below!
Note: We are not legal experts or tax preparation professionals, so always consult an accountant, tax prep professional, or attorney if you have concerns. This information is aimed at freelancers in the United States. Freelancers in other locations may find this information useful for determining what questions they need to ask and answer based on their city, country, or region.
Last Updated on July 1, 2023.
