By Carol H Cox
Many people find it challenging to consistently and sufficiently put money away for retirement. Workers who piece together their monthly income from freelance and part-time jobs can find this particularly challenging. It’s easy to get lost in the trees of “making a living” and lose sight of the forest of “providing lifetime income.”
Social Security will no doubt still exist when the freelancers of today retire, but by then who knows at what age retirees will become eligible and how much money they will receive? Individuals will need to depend more on their own savings for their post-working years.
Your expected retirement date may seem quite distant, especially if you’re looking out over a 30-year, or more, time horizon. So why start now? Well, it’s usually much easier to put away relatively smaller amounts of money over a lengthy period than much larger amounts later in life.
The younger you start saving for retirement, the better. The earlier you start the longer your invested dollars will have to compound and grow. Whether you have a Roth IRA (Individual Retirement Arrangement), traditional IRA, SEP IRA, or a Solo 401(k) plan, the retirement money that you eventually accumulate can give you more flexibility in living your later years in the manner you desire.
Retirement Plan Options for the Freelancer
There are four common options for individuals wishing to set up their own retirement accounts: a Roth IRA, a Traditional IRA, a SEP IRA, and a Solo 401(k) plan. There are different rules for each plan, as to annual income requirements, maximum contributions allowed, whether contributions or withdrawals are taxable, and documents to be filed.
If your income is lower now and you expect it to be higher by retirement, then you may want to consider a Roth IRA. A Roth IRA provides for no tax deductions on current earnings, but withdrawals are tax free at the IRS sanctioned retirement age, usually 59.5 years old. For 2017 the maximum contribution is $5,500 annually for individuals age 49 or younger. You’re essentially paying more taxes today in exchange for pulling out money tax free later. [Note: there are maximum income rules that limit the usage of Roth IRAs.]
A Tradition IRA has the same contribution limits as a Roth IRA, only you get the tax deductions up front and pay more taxes at the time you withdraw money at retirement age. If you think you’ll be in a lower tax bracket at retirement age than you are today, this may be a preferred option.
In order to put more money away for retirement if your earnings are higher, you could look at either a SEP IRA or a Solo 401(k) plan. Both of these allow maximum contributions of up to $54,000 for 2017, but the Solo 401(k) can allow you to take out loans from your plan (depending on where you set the plan up). Another advantage of the Solo 401(k) plan is that it’s possible you can contribute even more money as a family to this type of plan if your spouse is a salaried individual working in your business.
All four types of retirement plans can be set up at major financial institutions, just be mindful that fees, initial investment requirements, investment choices, and features (especially in the case of Solo 401(k) plans) can vary greatly.
[Note: for those 50 year old or more the contributions levels are slightly higher.]
Additional resources can be found here:
- Discussion of individual retirement saving options: Nerdwallet
- Explanations of Solo 401(k) plan options: The College Investor and US News
- Comparison chart of Roth vs. Traditional IRA: IRS
Automatic Contributions are Key
No matter which type of savings plan you choose, setting up regular automatic contributions is key. Whatever requires the least amount of monthly action on your part is likely to be the easiest and least painful method. Many finance companies that offer retirement plans, provide an option for automatic periodic transfers from accountholder’s checking account to the individuals retirement account.
Setting up an initial monthly automatic transfer of, perhaps, $100, from your checking account that feeds into your retirement account may be better in the long run than trying to make sporadic lump-sum contributions. It can be difficult to consistently initiate periodic transfers on your own. Over time, you may want to slowly ratchet up the monthly transfer amount with your contribution limits in mind.
Once you’ve begun making contributions into your retirement account, the next step is to periodically invest those dollars in order to earn a reasonable return on your money.
An Easy Investment Option
A target-date mutual fund is one of the simplest ways to get started investing for those who want help creating and maintaining a well-run investment portfolio.
Target-date funds invest shareholders’ money in a diversified mix of investments. This mix is adjusted (reallocated) over time to become more conservative as the particular target date of the fund approaches. The target date is meant to represent the retirement date of that fund’s investors. Normally, investors choose a fund with a target date close to their expected retirement year. So, if you are expecting to retire in 2042, you might choose a fund with a target date of 2040. (These dates are usually spaced in five or ten year increments and the target date is included in the fund name.)
Some finance companies even have automatic investment plans, which periodically invest your money in a variety of mutual funds or other investments per your instructions. This can simplify the investment process even more.
Whatever target-date funds you’re considering, look for ones with low fees and an established track records—think mutual fund companies like Vanguard or Fidelity.
The sooner you start saving for retirement, the more wealth you can build. Whether you choose a Roth IRA, Traditional IRA, SEP IRA, or Solo 401(k) plan, it’s crucial to regularly contribute and invest those contributions. Along with this, it’s important to keep your fees low and diversify your investments—consider using well-diversified mutual funds. Taking these steps will put you in a better position to support yourself in retirement with other resources besides Social Security.