The lack of employer-sponsored retirement plans is another drawback of freelancing and self-employment. But just because you don’t have a corporation matching your 401K contributions doesn’t mean you should forgo retirement savings all together. Sure, freelance writing is flexible, but do you really want to continue doing it for the rest of your life? Can you do it for the rest of your life?
During retirement, you’ll need anywhere from 70% to 95% of your annual pre-retirement income. Of course, that depends on your financial situation when you retire. You’ll need more money during retirement if you still owe a mortgage or car loan, credit card, or student loan debt. Planning is key.
The Sooner the Better
You’ll always have a reason not to save for retirement. Making retirement savings a priority in your 20s and 30s gives you much more time to save than when you’re in your 40s and 50s. For example, if you want to save up $1 million by age 65, you need to contribute $2,259 each year if you start at age 25; $6,079 each year if you start at 35; and $17,459 a year if you wait until you’re 45 to start. (Source: ClarkHoward.com)
Contributing to a retirement fund can be more difficult as a freelancer because you don’t get the advantage of having your contributions automatically deducted from your paycheck. Instead, it’s up to you to transfer money into your retirement plan or find out whether your plan administrator has an option to automatically draft the money from your checking or savings account. Then, you have to make sure you have enough money in your checking account to cover retirement.
If you can’t figure out how to add retirement savings to your current spending, take out your budget to see if you can make room for it. You may not be able to contribute the same amount each month, especially during famine months, but you can make quarterly or annual retirement saving goals.
Tax Benefits of Retirement Savings
You’ll also get a tax benefit for contributing to retirement. You can generally take an above-the-line-tax deduction for your contributions to a retirement plan. An above-the-line deduction can be taken even if you don’t itemize your tax deductions, but only your federal tax liability is decreased. Above-the-line tax deductions don’t decrease your self-employment tax.
How to Save for Retirement
You can research retirement plans and open one on your own, or you can hire a financial planner to explain each of the retirement options and help you decide which plan is right for you. Beware, there are some financial planners who make a commission based on the financial products you buy and may push you in a certain direction. Other financial planners are paid a flat-fee regardless of which financial product you invest in.
Stay tuned. The next post will discuss retirement options available for freelance writers.