It may seem inconceivable, especially if a pandemic hits your internet company, so some of what follows may be overlooked until the ship isn’t sinking, but don’t wait a minute longer than that – deal? Freelancing is a risky way to work, rendered worse riskier by a severe absence of benefits often offered by more stable companies. The most important of which is a retirement fund.
So there are several schools of thought on how to begin saving and where to put your money, but the bottom line is that if you’re a freelancer, you should be allocating your retirement assets. Here are a few ideas about how to go about it.
It’s better to have a parachute in case things go bad before you even go into how to spend money on retirement. According to My Financial institution Tracker, start with a $1,000 emergency fund and add to it as you can until you have three to twelve months’ worth of costs.
This serves two purposes: ensuring that you’ll have plenty of time if you need to conduct an emergency job search and determining how much you can safely save each month without risking your internet company or lifestyle (inside cause).
Having a sizable quantity of money put aside for emergencies is always smart. Even if you never use it for the purpose you set it aside, it may help supplement your retirement when you decide it’s time to cash in.
My Financial Institution Tracker also recommends keeping your emergency money in a “high-yield” checking account, similar to an online savings account, rather than staying with traditional, low-interest savings accounts.
You must also budget for taxes, including budgeting 15% of your income to pay Social Security and Medicare, regardless of your tax bracket percentage. That suggests you’re most likely setting aside a sizable amount (at least 30%).
After you’ve built your emergency fund and planned for taxes, it’s good to have a general idea of how much wiggle space you have when it comes to saving for retirement.
Investing in a retirement account, such as an IRA, Roth IRA, 401(k), or a pension plan (sometimes known as an “outlined profit plan”), is a crucial aspect of saving for retirement.
Depending on your situation, each of these account types offers pros and disadvantages.
- A Roth IRA allows you to deposit a set amount each year, and you can usually open one quickly from various online locations. The money you put into a Roth IRA is pre-tax, which means you won’t have to pay taxes on the money you withdraw. On the other hand, your income may preclude you from investing — if you make more than a certain amount ($140,000 in 2021), you won’t be able to utilize a Roth IRA.
- There are many IRA options, each with a yearly contribution limit and varying tax requirements. For example, if you take money from a traditional IRA account, you’ll have to pay taxes on it, and the amount you may deposit is limited.
- A SEP IRA is similar, but the financing limit is far larger – and you may need to be self-employed (or an employer) to have one.
Nerd Pockets also points out that a 401(ok) is a low-cost option for self-employed people who don’t utilize anybody else, especially if you anticipate saving “a lot in some years — say, when business is booming — and less in others.” You may invest up to a specific amount ($58,000 in 2021) in a 401(k) plan before paying taxes, and you pay taxes on withdrawals after you start taking money out.
There are other more unusual retirement options available. Taxable Brokerage Accounts enable you to invest in stocks and bonds via a brokerage, and you may withdraw the funds whenever you want – but you’ll have to pay taxes on your holdings every year, which might be pricey in the long run.
And although defined profit plans are expensive and come with high fees, they allow you to set up a pension with more investment options than some of the lower-investment options.
Whatever option (or options – you may always spend money on many accounts) you choose, make sure you’re saving for retirement somehow. Remember that these accounts exhibit exponential growth, which indicates that the sooner you start saving, the better off you’ll be when it comes to retirement.