How to Save Money on Retirement As a Freelancer or Self-Employed
It is not easy to save money for retirement when you work full time and generate a steady monthly income. But if you work as a freelancer, small business owner, or independent contractor? Accumulating enough for retirement can be even more difficult because your income can vary greatly each month.
This post was originally published on MoneyRates.com .
You can make big money in one month. Next? Your income can drop to a minimum. Since your expenses don’t match up, saving money for retirement can be a challenge.
If you are self-employed, you also do not have the benefit of a 401 (k) retirement savings plan that you can automatically deposit retirement savings into every time you get paid [Update: There is one 401 (k) member plan for business owners without employees]. Fortunately, you can still save enough money for retirement years, even if your income is volatile. It’s all about planning your golden years and calculating how much you need to save for retirement each month to get there.
Here are five steps to take to save for retirement if you’re self-employed:
1. Be realistic about your retirement date
Freelancers and independent contractors often say they can keep working for as long as they need to. But this attitude is not necessarily realistic. “Freelancers are really no different from others,” says Teresa Gilarducci, economist and director of the Schwartz Center for Economic Policy Analysis at the New School for Social Research in New York. “They need to understand how long they can work and how much they need to save to get a comfortable pension.”
Why self-employed people can’t permanently postpone retirement
Gilarducci, author of How To Retire With Enough Money , says even self-employed people should bet on retirement at around age 65. Even if they want to work longer, there is no guarantee that someone will want to pay them. Gilarducci says: “Even if you want to keep working part-time, the job market changes a lot over time,” says Gilarducci. “Age discrimination is real. You may not be able to stay at work as long as you expected. ” This means you cannot save enough for retirement – or save enough each year for retirement years – just because you think you can work forever. …
2. Get your retirement savings
If you want to have enough money for retirement, you will generally need to save at least 10 percent of your paycheck annually if you are 30, 12 percent is 40, and about 40 percent is 50. did it because of fluctuations in your income? Then it’s time to start investing in your retirement savings account now. If you’re older and haven’t saved enough money, don’t worry about your past mistakes, says Katie Colby, president of Financial Independencents Inc. in Lansing. Michigan. It’s too late to do something about the past. But now you can start saving more money. You can also check your spending to make sure you are not wasting money every month unnecessarily. “You don’t have to worry about what you haven’t done yet,” says Colby. “People say you need to start saving early and often. But it won’t do you any good if you haven’t. “
3. Create a larger emergency savings fund.
Recuten Miller, a certified financial planner and portfolio manager at the Palisades Hudson Financial Group’s Atlanta office, says it is important for people with unpredictable income to build a larger pool of assets. This will help you avoid emergencies and will serve as insurance in times of trouble.
How much should freelancers or business owners save on emergency funds
When people have this larger emergency fund, they won’t be tempted to save on keeping money for their retirement because they’ll have the money they need to survive the months when there aren’t many checks coming in.
“Instead of the usual three to six months of spending recommended for the contingency fund, I would recommend creating an emergency fund that will cover at least nine to twelve months of expenses,” says Miller. “These funds can be used to support you if you are not getting enough income.”
4. Take advantage of retirement savings beyond 401 (k) s
While self-employed people do not have access to 401 (k) plans, they can save on a Simplified Employee Pension (SEP) IRA. Designed for those who do not work for others, these savings mechanisms have the same basic characteristics as traditional IRAs. But they also enable self-employed people to save on a large scale.
5. Separation of savings in accounts for different financial purposes.
Those with unpredictable income need even more control over their finances than the average employee if they want to be sure they have enough money to retire. That’s why Kirk Jewell, president of Global Financial Services in Flint, Michigan, makes sure all of his individual clients open four accounts:
1. Personal checking account
Customers will use this checking account to pay bills and fund their lifestyle.
2. Savings account.
If you are self-employed, you can create a contingency fund in this account.
3. Bank account for business.
Open a dedicated business account so you can deposit money into that account and use it to reinvest in your business for everything from marketing to buying supplies and hiring employees.
4. Account for paying taxes.
Jewell recommends that his clients open an account to cover taxes – an important and often overlooked expense for the self-employed. After self-employed clients complete these accounts every month, they know exactly how much money they can then deposit into a SEP IRA, traditional IRA, Roth IRA, or other savings vehicle for retirement. “It’s a lot easier when you’re an employee and you can deposit into a 401 (k) account without thinking about it,” Jewell said. “When you run your own business or work as a freelancer, you have a lot to think about. Your business is a very time-consuming object. However, with the discipline to open these four accounts, you can help make sure you have enough money set aside for retirement. ”
Retirement Savings Guide for Self Employed or Freelance Employees | MoneyRates.com