By Abby Hayes
Are you saving for retirement?
Without employer matches and helpful HR departments to rely on, we freelance writers are on our own for retirement planning.
No matter what your personal situation looks like, a smart freelancer needs to plan for retirement just like we plan for taxes, marketing, and other business-related costs.
With these steps, youâ€™ll be well on your way to saving what you need for retirement. And that tax bill may be smaller, too.
1. Set goals by age
Instead of setting a seemingly impossible end goal for your retirement savings, focus on reaching smaller goals by a certain age. Fidelity suggests saving 1X your average annual income by the age of 35, 3X your salary by 45, and 4X your salary by 55.
Breaking down your goals this way means youâ€™re more likely to stay on track.
2. Use the right account
Many freelancers mistakenly think that their best retirement savings option is a traditional or Roth IRA with a low $5,500-$6,500 contribution limit. But, actually, there are much better options around for US-based and US-expat freelancers, including the following:
- Solo 401(k): Choose tax savings now or later with both traditional and Roth options. A traditional IRA lets you tax-shelter money now, where a Roth will let you withdraw it tax-free at retirement. Limits are subject to change, but in 2014 you can contribute up to $17,500 (plus an extra $5,500 for those 50 and older) as an â€œemployee,â€ and then add up to 25 percent of your net self-employment income up to an overall limit of $52,000, not including over-50 “catch-up” contributions.
- SEP-IRA: In this more streamlined account, you can save up to 25 percent of your net self-employment earnings, up to an overall limit of $52,000 in 2014.
- SIMPLE IRA: A great option for low-to-middle earning freelancers, the SIMPLE IRA lets you set aside up to $12,000 (plus an extra $2,500 for those 50 and older) in 2014. Plus, your business will add either 2 percent of your total income or a 3 percent matching contribution.
Any of these options gives you the flexibility to save much more money in years where you earn more, so you can reach your retirement goals more quickly. And if youâ€™re in the UK, you have the option of saving in a personal pension, which offers tax relief in the form of bonus savings on contributions up to Â£50,000 for the 2013-14 tax year.
3. Set monthly goals
There are two ways to set monthly retirement savings goals: by dollar amount and by percentage.
If you have a fairly steady freelancing income, you can set a dollar amount goal â€“ whether thatâ€™s $50 per month or $500 per month. In this case, set up an automatic monthly transfer to have the money wired from your checking account to your retirement savings account monthly. That way, you wonâ€™t be tempted to spend it!
But if youâ€™re like many freelancers, your income is a bit of a roller coaster. In this case, consider setting a percentage-based goal â€“ like 5-20 percent of your income. Then, get in the habit of automatically transferring that percentage of every single payment you get into your retirement savings account. Again, when you build this habit, you wonâ€™t be tempted to spend your retirement savings.
4. Kick in additional year-end contributions
Retirement savings contributions are a great way to save on taxes for both US and UK freelancers. If you find that youâ€™ve got some money lying around at the end of the year, consider kicking some of it into your retirement fund.
In the US, the additional tax savings could mean that you write Uncle Sam a much smaller end-of-year tax payment. In the UK, the more you max out your personal pension contributions for the year, the more tax relief will grow your retirement savings for you.
Abby Hayes blogs about the intersection of freelancing and money at Finance for Freelance, and is the author ofÂ 47 Money Saving Tax Deductions for Freelancers, a guide to help freelancers squeeze out more savings at tax time.