How to Prepare for Retirement as a Freelancer

Being a freelancer offers you many benefits, including a flexible work schedule, the option to work from home, and a range of interesting projects that excite rather than bore you.

However, there are some detractions to the freelance lifestyle, including not planning and saving for retirement.

Many employed workers are given the benefit of a 401(k) or other retirement savings plans, which provide them with employer contributions and other incentives to set aside money for retirement.

Freelancers doesn’t have that benefit, so they often end up spending the majority of their earnings on bills, education expenses, etc. Likewise, because freelancer earnings are more volatile than those of employees, it’s hard to maintain a set retirement allotment.

As a freelancer, how do you prepare for your own retirement? Here are some steps:

Retirement planning for freelancers

1. Understand the “3-legged stool” of retirement.

Retirement funding is typically derived from three sources, which are often referred to as the “3-legged stool.”

These sources are personal savings/investments, Social Security and group employer-managed retirement plans.

Freelancers typically only have two legs of that stool because they are not employed. Many freelancers have little or no savings, giving them only one leg to stand on- and that’s assuming they have paid enough self-employment tax to collect Social Security and Medicare payouts.

2. Generate a freelancer-managed retirement plan.

Luckily, you don’t need an employer to generate a comparable retirement plan. As a freelancer, you can choose from the following programs to build up that third leg of your retirement:

Simplified employee pension (SEP)-IRA

If you have your own LLC or are otherwise incorporated as a company, you can create and contribute to a SEP-IRA.

Per IRS regulations, this type of retirement plan allows you to contribute either up to 25% of your gross income or $61,000 per year.

The advantage of SEP-IRAs is that they can be set up for free, and the only fees you’ll pay is for the trades.

Keep in mind that these plans do penalize you (at a 10% fee) for early withdrawal of your savings, which is defined as before the age of 59 1/2. Because the SEP-IRA accepts your gross earnings, you’ll also eventually be taxed on your withdrawals.

Individual 401(k)

As a freelancer, you are your own employer and employee.

As such, you can contribute to your own personal 401(k) retirement plan twice- once as yourself (i.e., the employee), and once more as an employer. This has the advantage of enabling you to quickly build up your retirement account.

The IRS states that freelancers can contribute up to $20,500 of their net earnings to an individual 401(k) as employees; freelancers who are at least 50 years of age can contribute an additional $6,000.

Furthermore, as their own employers, freelancers can additionally contribute up to 25% of their net earnings.

This reduces your yearly taxes considerably. If you are incorporated, you can also write off your retirement contributions as a business expense.

Keep in mind that, just like with the SEP-IRA, you will be taxed on your eventual withdrawals; also, withdrawals that occur before the age of 59 1/2 will incur a 10% penalty fee.

Roth IRA

Being possibly the most freelancer-friendly retirement account, the Roth IRA takes into account the fact that freelancers often have unstable income and/or need access to cash now.

For these reasons alone, you should definitely consider setting up a Roth IRA as your retirement savings account.

To qualify for a Roth in 2022, your adjusted gross income (AGI) must be under $129,000 (or $204,000 if married and filing jointly).

You can contribute up to $5,500 per year, or up to $6,500 per year if you’re over 50 years of age.

Because you make post-tax contributions into this account, you are not taxed on your eventual withdrawals from a Roth IRA.

Also, you can actually withdraw money from your Roth IRA at any time prior to reaching age 59 1/2 without a penalty– provided you only withdraw from the principal amount. So, if you are suddenly strapped for cash, you have a convenient emergency stash of money that you can access.

Dividend stock plan

While it’s not the typical program you think about when considering a retirement savings account, creating and regularly investing in a dividend stock plan is one additional strategy that you can use to fund your retirement.

There are some major freelancer-friendly advantages to such a plan, namely:

You can collect an additional “income” from dividends- or not. Dividend stocks pay quarterly or monthly dividends that you can use to supplement your freelance income when times are tough.

During the times when your freelance income covers your living expenses, you can simply re-invest your dividends into more dividend-bearing stock.

You can withdraw the principal and/or earnings at any time. Unlike most retirement savings accounts, your dividend stock plan enables you to cash out some or all of your savings at any time.

So, if you have a major financial catastrophe, you can fall back on your stock plan and use it to bail you out of trouble.

Dividend stocks are generally less volatile than traditional growth stocks- but they are not impervious to losing value at least during short-term spans (1-5 years) of time. Thus, you should research which stocks you plan to purchase and understand that you may incur losses at least during the short-term.

What if you still don’t have a retirement plan at age 50+?

If you are a freelancer who is 50 years of age of older, it can seem futile to start planning your retirement now.

However, keep in mind that most freelance careers go beyond traditional retirement age and many freelancers work well into their 70’s (or beyond). This is often because, for a freelancer, the lines between passion and paycheck are blurred.

Also, because many freelancers work from home, it’s much easier to just take your career with you after you move somewhere sunnier/warmer/cheaper.

So, even if you are older, you can still plan for your retirement and use various IRS “catch-up” rules to grow your nest egg. The key is to start the process and not procrastinate further.

If all else fails and you are still struggling to make ends meet during your retirement years, there are additional ways to make money.