As an independent contractor or freelancer, you know the importance of planning ahead for retirement. But building a nest egg can be daunting without employer contributions. This article provides actionable tips to start saving and investing even modest amounts. You’ll learn strategies to automate contributions and take advantage of compound growth. Discover low-fee investment options and tax advantages available. With smart planning and discipline, you can gain peace of mind and financial security for your non-salaried future. The key is starting early and sticking to a consistent savings plan. You control your financial destiny.
Assessing Your Current Financial Situation
The first step to building a retirement plan without employer contributions is evaluating your current financial standing. Review your income sources, living expenses, assets, and liabilities to determine how much you can allocate for retirement savings each month. Be realistic about your budget and do not overcommit, as that may discourage you from following through.
Income
As a freelancer or gig worker, your income may vary from month to month. Analyze your income over the past year to determine an average amount you can expect to earn monthly after taxes. Factor in seasonal fluctuations or other variables that may impact your income.
Expenses
Carefully track your expenses for several months to identify areas where you can reduce or cut costs. Look for expenses that seem disproportionately high and ways to decrease or eliminate them. Establish a lean yet realistic budget and spending plan. Consider expenses that may change or arise as you age to ensure your retirement plan addresses future needs.
Assets and Liabilities
List all assets like savings, investments, and valuables that could generate income in retirement. Then, list any liabilities such as loans, credit cards, or other debt where interest charges accrue. Pay off high-interest debts to avoid having money that could be put towards retirement siphoned off by interest payments.
By analyzing your full financial situation, you will have a clear picture of how much you can contribute to your retirement plan each month to achieve your goals. With diligent saving and investing, you can build wealth for your retirement even without employer contributions. But you must start now and be disciplined to make it happen.
Setting Specific Retirement Goals
To build an adequate retirement plan, you need to determine concrete financial objectives. Calculate how much income you need each month to fund your desired lifestyle. Factor in essential expenses like housing, food, and healthcare as well as discretionary items such as travel and entertainment. Once you have an initial monthly target, determine the total nest egg required to generate that income over a 20- to 30-year retirement.
Saving Enough
To accumulate that sum, begin contributing the maximum allowed to tax-advantaged retirement accounts such as an IRA or solo 401(k). In 2020, the contribution limits are $6,000 for an IRA and $19,500 for a solo 401(k), with additional catch-up contributions of $1,000 and $6,500 respectively for individuals over 50. Consider an annual contribution increase of 2-3% to counter inflation. If applicable, strive to save an amount that qualifies for any employer matching programs. A target of saving 10-15% of your income for retirement is advisable.
Choosing the Right Investment Mix
Next, invest your contributions for the best potential returns. A blend of stocks, bonds, and cash equivalents is commonly advised for long-term growth. A greater proportion of stocks, around 70-80%, in younger years allows for increased potential for long-term growth. As retirement approaches, consider transitioning to more conservative investments to safeguard your capital. The specific allocation should be tailored to your financial circumstances, timeline, and risk tolerance. Seeking advice from a financial advisor may be prudent.
With clearly defined goals, consistent saving, and a prudent investment strategy, you can build a retirement fund to enjoy life after your working years. Staying disciplined and making adjustments as needed will help ensure you meet your objectives. While it may require effort and sacrifice, peace of mind about your financial future is worth the investment.
Choosing the Right Retirement Accounts
As a freelancer or gig worker without employer-sponsored retirement benefits, you’ll need to set up your own retirement accounts to save for the future. The two main options are individual retirement accounts (IRAs) and solo 401(k)s.
IRAs
IRAs come in two varieties: traditional IRAs and Roth IRAs. With a traditional IRA, contributions may be tax deductible, depending on your income, but withdrawals in retirement are taxed as income. Roth IRA contributions are not tax deductible, but withdrawals in retirement are tax-free.
For 2019, you can contribute up to $6,000 to an IRA, or $7,000 if you’re 50 or older. IRAs typically offer more investment options than an employer plan. You can open an IRA through brokerages like Vanguard, Fidelity, or Charles Schwab.
Solo 401(k)s
A solo 401(k), also known as an individual 401(k), works similarly to an employer-sponsored 401(k). Contributions are tax deferred, and the 2019 contribution limit is $19,000, or $25,000 if you’re 50 or older. Solo 401(k)s allow both employee and employer contributions. As the employee, you can contribute up to $19,000. As the employer, you can contribute up to 25% of your net self-employment income, up to $56,000 for 2019.
Solo 401(k)s typically offer more generous contribution limits than IRAs, but they also tend to have higher fees and more administrative requirements. You’ll need to establish a plan document and file an annual Form 5500 with the IRS. Solo 401(k)s are offered by some brokerages, banks, and retirement plan providers.
For many freelancers and gig workers, a combination of IRAs and a solo 401(k) can be an excellent way to maximize tax-advantaged retirement savings and plan for the future without an employer’s help. Consult a financial advisor to determine the right approach based on your income and retirement goals.
Maximizing 401(k) and IRA Contributions
401(k) Plans
If you have access to a 401(k) plan through a current or former employer, aim to maximize your contributions to capitalize on any matching incentives. Contribute at least the amount necessary to receive matching funds, as this represents essentially free money that can enhance your retirement savings. The annual contribution limit for 401(k) plans in 2020 is $19,500 for individuals under 50 and $26,000 for those aged 50 and above.
Traditional IRAs
If you do not have access to an employer-sponsored plan, open a traditional IRA. The annual contribution limit for the year 2020 is $6,000 for individuals under 50 and $7,000 for those aged 50 and above. The potential tax deductibility of contributions to a traditional IRA depends on factors such as income and participation in a workplace retirement plan. Such deductions can assist in reducing your taxable income for the respective year.
Roth IRAs
Roth IRAs provide tax-free growth and tax-free withdrawals during retirement, with contribution limits identical to traditional IRAs. Although contributions are not tax deductible, earnings in the account can be withdrawn tax-free in retirement if the account has been open for a minimum of five years, and the account holder is over the age of 59½. Roth IRAs present a beneficial avenue for freelancers and gig workers to accumulate retirement funds.
Consider a Side Hustle
If maximizing your retirement account contributions is still not enough, consider developing a side gig to generate extra income specifically earmarked for your retirement savings. Drive for a ride-sharing service in your spare time, do freelance work in your field of expertise, or turn a hobby into a money-making endeavor. Any earnings from a side hustle can provide funds to contribute to an IRA, either traditional or Roth. Building wealth for retirement may require resourcefulness and a willingness to generate income from multiple sources. With discipline and time, maximizing all options available to you can help ensure a comfortable retirement.
Investing Your Savings Wisely
Choose a Brokerage Account
To invest your savings, you’ll need a brokerage account. Do some research to find an affordable account that meets your needs. Consider low-cost options like Vanguard, Fidelity, or Charles Schwab. These companies offer brokerage accounts with no minimum balance requirements or commissions on stock, ETF, and options trades.
Build a Diversified Portfolio
Don’t put all your eggs in one basket. An investment strategy that includes a mix of asset classes such as stocks, bonds, and cash is considered less risky than concentrating investments solely in one type of asset. For long-term growth, consider a mix of:
- Domestic and international stocks: Aim for 60-80% of your portfolio. Look for low-cost stock index funds and ETFs.
- Bonds: Invest 20-40% in bond funds for income and stability. Government and corporate bond funds are good options.
- Cash: Keep some money in a high-yield savings account as an emergency fund.
Keep Fees Low
Look for investments with low fees like index funds and ETFs. High fees cut into your returns significantly over time through a process called fee creep. For the best results, keep total fees under 0.50% of your portfolio value each year.
Rebalance Regularly
As the market changes, the allocations in your portfolio will shift. Rebalance once a year or so by selling portions of funds and buying others to return your portfolio to your target allocations. For example, if stocks have done well and now make up 70% of your portfolio, sell some stock funds and buy more bond funds to get back to your 60% target.
Increase Contributions Over Time
As your income increases over the years, increase your contributions to your brokerage account. Even small, regular increases can significantly impact your long-term returns through the power of compounding. Aim to contribute enough to meet your retirement goals based on your age and financial situation.
Following these best practices for investing your savings can help turn your hard-earned money into a nest egg that provides financial security in retirement. With low-cost investments, diversification, and a long-term perspective, you’ll be on your way to building wealth on your own terms.
Exploring Other Income Sources
To supplement your retirement plan without employer contributions, consider generating additional income from secondary sources. These alternative revenue streams can provide funds to contribute to your retirement accounts, building your nest egg over time through compounding returns.
Develop a Side Hustle
A “side hustle” refers to a part-time job or business you operate in addition to your primary source of income. Popular side hustles include driving for a ridesharing service, freelancing, online tutoring, website or graphic design, and selling goods online. A side hustle is ideal for freelancers and gig workers since you can operate it around your unpredictable schedule. The income from your side hustle can be contributed directly to your retirement accounts, providing funds for investment.
Invest in the Stock Market
If you have funds to invest outside of retirement accounts, the stock market offers the potential for solid returns over the long run. While the market is volatile, index funds and ETFs offer a way to invest in the overall market. Returns from investments in the stock market could provide supplemental income to contribute to your retirement plan. However, only invest money in the stock market that you do not need for essential expenses, as there is always a chance of loss.
Develop Passive Income
Passive income refers to revenue generated from ventures that do not require active involvement to operate. Some options for developing passive income include:
- Rental property: Buy residential or commercial property to rent out for recurring income. Rent payments can provide funds to contribute to retirement accounts.
- Online courses: Create and sell online video courses to generate revenue. Once established, online courses can provide passive income for years.
- Affiliate marketing: Generate income by endorsing products and services from other companies on your website or social media channels through affiliate marketing. Affiliate income can be contributed to retirement plans.
- Blogging: Build a blog and generate revenue from ads, sponsorships, and affiliate links. Successful blogs can earn passive income for many years.
By developing additional income streams outside of your primary work, you can generate funds to contribute to retirement accounts without employer matching. Over time, consistent contributions and compounded returns can help build your wealth for a secure retirement.
Managing Debt and Expenses
Create a Budget
To effectively build a retirement plan without employer contributions, you must first get your finances in order by creating a comprehensive budget. Monitor your income and expenditures to gain insight into your cash flow. Identify areas where you can cut or eliminate expenses, such as dining out or entertainment. Set limits for discretionary spending and divert the extra funds to your retirement savings.
Pay off High-Interest Debts
High-interest debts like credit cards reduce your ability to save for retirement. Make paying off these debts a priority in your budget. Pay more than the minimum due each month to reduce the principal faster. Once paid off, add those payments to your retirement contributions.
Automate Savings
The most effective way to save for retirement without an employer match is to automate contributions from your paycheck or bank account. Have a set amount automatically transferred to an IRA, Roth IRA or individual brokerage account each month. Start with whatever amount you can and increase contributions over time as your income rises or expenses decrease.
Consider Additional Streams of Income
For freelancers and the self-employed, generating additional income streams is key to building retirement savings. Consider taking on additional freelance work, starting a side business, selling items online, or other ways to generate cash flow. Add the extra money to your retirement contributions each month. Over time, the power of compounding returns can help these contributions grow substantially.
Plan for Healthcare Costs
Without an employer, you alone are responsible for health insurance and medical costs in retirement. Factor healthcare expenses into your retirement budget and savings goals. You may need upwards of $300,000 or more in retirement savings just to cover healthcare costs. Account for this significant expense as you calculate how much you need to save each month to adequately fund your retirement.
Managing your income, expenses, and debt while consistently contributing to retirement savings accounts is challenging but critical for freelancers and the self-employed. With diligent effort, you can build a sizeable nest egg to fund a comfortable retirement. Consider consulting a financial advisor to help keep you on track and make the most of your hard-earned money.
Tax Planning for Retirement
As a freelancer, you are responsible for funding and managing your own retirement accounts. By developing a comprehensive tax strategy, you can take advantage of tax-advantaged accounts to build your nest egg.
Consider opening an individual retirement account (IRA), choosing between a traditional IRA and a Roth IRA. Contributions to traditional IRAs may be tax-deductible, reducing your taxable income. However, distributions in retirement are taxed as income. Roth IRA contributions are not tax-deductible, but qualified distributions are tax-free. Choose the option that suits your current and future tax bracket.
If possible, contribute the maximum amount allowed each year to maximize tax benefits. In 2021, the annual contribution limit is $6,000, or $7,000 if you’re 50 or older. You can contribute to both traditional and Roth IRAs, but the combined total cannot exceed the yearly limit. Consider opening a solo 401(k) or SEP IRA as well. As an employer, you can contribute up to $57,000 in 2021, or $63,500 if you’re 50 or older. Solo 401(k)s permit contributions as both an employee and employer, while SEP IRAs only allow employer contributions. Both provide tax-advantaged retirement savings.
Develop a withdrawal strategy to avoid penalties. With traditional IRAs, required minimum distributions (RMDs) must begin at age 72 to avoid penalties. Roth IRAs have no RMDs during your lifetime. For solo 401(k)s and SEP IRAs, RMDs must begin at age 72. Failure to take RMDs results in a 50% penalty on the amount that should have been withdrawn.
Meeting with a financial advisor can help determine the right approach for your situation. They can review your income, expenses, and retirement goals to create a customized plan using a combination of taxable and tax-advantaged accounts to optimize your savings and pay the least amount in taxes each year. With proper planning, you can build wealth for your retirement years as an independent worker.
Retirement Planning FAQs for Freelancers
As an independent contractor, you are responsible for your own retirement planning without employer contributions. This means setting up and funding your own retirement accounts to build wealth for your golden years. Here are some common questions freelancers have about retirement planning and accounts:
What retirement account options are suitable for freelancers? The primary choices for the self-employed include individual retirement accounts (IRAs) and solo 401(k)s. IRAs, such as traditional and Roth IRAs, enable contributions of up to $6,000 annually ($7,000 for those 50 or older) for 2020-2021. A solo 401(k) permits contributions of up to $57,000 per year, allowing contributions as both the employee and employer.
Regarding retirement savings, experts recommend setting aside at least 10-15% of your income each year, with higher contributions being advantageous. Freelancers should aim for the upper end of this range, particularly as they lack employer matches.
Should I open an IRA or solo 401(k)? This depends on several factors like how much you want to contribute and your income level. IRAs typically have lower fees but lower contribution limits. A solo 401(k) allows much higher contributions but often has higher fees. If your income is over $139,000, a solo 401(k) may be better since IRA contributions are limited at higher incomes.
When should I start contributing to my retirement accounts? The sooner the better. Due to the power of compounding returns, even small amounts contributed in your 20s and 30s can make a big difference. If possible, automate monthly or quarterly contributions to your retirement accounts so you can take advantage of dollar-cost averaging and avoid forgetting.
Can I change or combine retirement accounts? Yes, as your needs and income change, you can convert, rollover or combine retirement accounts. For example, you may start with an IRA and then open a solo 401(k) later and rollover the IRA funds. You can also convert traditional retirement funds to Roth accounts or vice versa in some cases. It is best to speak to a financial advisor before making major changes to your retirement accounts.
Conclusion
You now have the tools to start building your retirement savings, even without employer contributions. Begin by opening a retirement account, like an IRA. Then, automate your contributions to consistently grow your savings over time. Stick to your budget, and increase contributions whenever possible. Consider part-time work or side gigs to supplement your income. The key is consistency and discipline. With the right strategy tailored to your situation, you can take control of your financial future. Though it requires diligence, you have the power to create the retirement you desire.