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FOR THE NEW FREELANCERS and GIG WORKERS – THINKING AHEAD TO RETIREMENT SAVINGS


 

– making sure you have something tucked away when you decide to retire, someday...

 

(disclaimer: I’m an artist, not a financial adviser.  Use the below ideas only as a guide.  When you get serious about investing, do yourself a big favor and go find a professional financial adviser.)

 

All of us, upon leaving college, are looking forward to a busy career in our chosen fields.  It's getting that job that seems so important right now.  But saving for later?  Hey, we're more worried about putting some dollars in our pockets right now!

Those of us who find the work we like with a larger corporation will generally be included in that firm's employee savings plan, which is usually a 401(k).  This plan includes a long menu of savings options from which to choose.  You opt to set aside a certain amount, or percentage, of your paycheck, which is invested for you.  Usually you'll wait to access that growing (hopefully!) amount until the age of 59-and-a-half.  Your saving process is on autopilot for as long as you work with a given company; you hardly have to think about it, and you have the benefit of a constantly increasing pile of money against that faraway retirement day.

But what about the rest of us, who might spend most of our career life as a freelancer, working on our own, working for ourselves?  Who does our planning?  And some weeks we might be flush with cash; other weeks we may feel like we're going begging.  How do we get ourselves to a point where, whatever money we may happen to have, we can continue to set aside something for our own futures?

Well, we do it ourselves.  Fortunately, it's not difficult to do – it just takes a little knowhow to get it started, and some discipline to keep it going.  As the saying goes: pay yourself first!  Who are you really working for, anyway?  Not the IRS, that's for sure.  Many people have gotten steadily wealthier over time by simply taking out 10% of whatever money comes their way and putting it aside, and living on the 90% that remains.  That 10% continues to stack up until it becomes an impressive pile... that is, if it's done consistently.  But that growing pile is pretty tempting.  What do we do with it?  Invest it, of course.  

A savings account is easy to start, but it doesn't pay much interest, and it's way too easy to dip into a savings account when the car needs some new shoes.  We need a strategy that allows us to save easily and continuously, but keeps that money far enough out of our reach so that it doesn't get used for piddly things.

Without the convenience of an employer-sponsored savings vehicle (401(k)'s or 403(b)'s are the usual things you'll find), planning for retirement can be quite a challenge. A survey by the Freelancers Union survey found that 27% of freelancers have not saved anything for retirement.  Zero!  How does anyone retire on $0.00?  That's pretty much true of most Americans generally.  We need to get better at saving!

It’s not impossible to save, however; it's just that we're not used to it.  Media, advertising and culture condition us to spend money, not accumulate it.  There are a number of options to consider for saving, as long as you’re willing to put in some effort. When you are your own boss, you have to personally pull that savings percentage out of your paycheck, set up the investment accounts, fund them regularly, and keep an eye on them. You have access to the same investments that other employers do, and depending on your income, you might even be able to save more in your tax-deferred accounts than the W-2 crowd can in their retirement plan.


The first type of retirement account worth considering is the Individual Retirement Account or IRA. If you’re planning on putting away less than $5,000 per year, the IRA or Roth IRA is the easiest option. You can set one up at the bank you're using.  Contributions to an IRA can be transferred from your from a savings account into the IRA.  This is the easiest way, but probably not the most cost-effective.  Commercial banks' fees for this service are higher than some other options – from 0.2% to as much as 3% of that account value per year.  Why give some bank your investment profit?  You want to get those fees to a minimum, around 0.1%.  Here is the next option:

If you want to set aside more money annually than $5,000, consider a SEP IRA, short for Simplified Employee Pension Individual Retirement Arrangement. Instead of using your local bank, you can set one of these up, as well as the IRA or Roth IRA mentioned before, at any major brokerage house, such as Fidelity, E*Trade or Charles Schwab. The maximum contribution per year is 25% of your net income (up to $51,000 in 2013).  Like an IRA, the contributions are tax-deductible. You can also crunch the numbers using IRS Publication 560 to see what your allowable contribution is.  The fees at these institutions are about the lowest you'll find – about 0.1% or so.

Most people consider the Roth IRA to be the best retirement savings choice for most freelancers or regularly-working people.  In these investments, taxes on the money you save are deducted up front, which means that when you take distributions from your savings when you retire, that money will not be taxed.

Want to defer even more? Great!  You must be totally raking it in!  Still another option is the Solo 401(k). This is very similar to a company 401(k), where, as a participant, you can defer up to $17,500 in 2013. Additionally, you can invest up to 25% of your net income, or no more than $51,000. Again, IRS Publication 560 has some handy worksheets to help you figure out the exact allowable amount. Similar to the other investment accounts mentioned, you can reduce your taxable income with your contributions. 

 

Most of these options have an annual limit to what you can contribute to them each year.  But of course, nothing stops you from saving more money elsewhere, if you have it to set aside.  It's usually a better idea to put your cash to work, rather than stuffing it in a mattress. It's possible to have several IRA or Roth IRA accounts, or to put other money aside in mutual funds.  Search online for investment bank sites, such as those for Fidelity, Vanguard, T. Rowe Price and dozens of others, and educate yourself about the workings of mutual funds.  You can get started with some of these investment vehicles with a minimum initial investment of $500 or $1000-.  Contributions to mutual fund accounts are not tax-deductible but, on the other hand, there are no annual limits on how much you can deposit in them.

 

None of this is rocket science.  It's actually pretty easy, and anyone can do it – it's just that for most of us, the temptations large and small that life offers us seem so much more important than a silly little thing like saving for the things we want in the future.  We buy fancy coffee drinks rather than toss that money into an IRA.  We keep putting off saving, because retirement seems so far away.  But if you can make yourself save regularly, the stock market and the wonders of compound interest can operate while you're busy with your chosen career, and make you well-situated when you decide you don't feel like going to work someday.

 

Start this saving process early!  Save early; save often; save regularly.  Don't wait until your 30's to suddenly wake up and realize with shock that you may need some serious money later on.  The earlier you start saving, even if it's just a little bit of money at a time, the longer that money has to grow.  You may not have a lot of money at the moment, but you do have a lot of time – make that time work for you!

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Artist from the Rose City of Emerald Oregon.


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Writing about skills necessary for understanding storyboarding, film grammar, and drawing skills. And stuff.

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