There is a plethora of freedoms that come with freelancing – from being your own boss, to setting your own schedule, to ultimately determining how much you earn. Your destiny truly is in your hands!
While this is generally exciting, it can also be a bit scary – especially when it comes to retirement planning. A traditional employee can elect to have retirement funds automatically deducted from their pay check and matched by their employer. Freelancers have no such luxury – making this “freedom” a double-edged sword.
Fortunately, saving and investing for retirement doesn’t have to be challenging as a freelancer. The following strategies can help ensure that you’re well prepared to leave the workforce in comfort, when the time arrives.
How to Prepare for Retirement as a Freelance?
The following seven tips will make saving and planning for retirement far more effective. Implement these strategies today, and “future you” will be very thankful.
1. Pay Your Taxes
It can be very easy (and tempting) for freelancers to underreport their income on tax day. Not only can this unethical behavior get you into legal trouble, it also undermines your retirement. According to the IRS, social security payments are based on the 35 years that you earned the most. The more you pay in, the more you receive during retirement. Many countries use a similar system for retirement benefits.
2. Invest Through Retirement Accounts
Regular investment accounts are a great way to build wealth with money you can easily access. However, there are tremendous tax benefits to investing in retirement accounts. As a freelancer, you can invest in an IRA (roth or traditional), SEP-IRA, and Personal 401(k). Although you can’t access these funds until you retire, the tax benefits mean your wealth will increase much faster. And using a robo-advisor service for these investments makes it almost effortless.
3. Schedule Monthly Contributions
It’s recommended that a 25 year old employee saves 10% of his income for retirement. For a freelancer who doesn’t receive an additional 1-5% from their employer, it’s probably smarter to aim for 20%. This is particularly true if you’re older. How do you make this happen? Schedule automatic monthly payments into your retirement account. Some months you may have to pause the payments and other months you may be able to put in more – but an automated payment ensures that your retirement savings continue to grow.
4. Invest for the Long Haul
According to the book, The Millionaire Next Door, the reason there are so few millionaire stock brokers is because they constantly buy and sell stocks – striving for a fast buck. Meanwhile, the secret to accumulating wealth is to buy-and-hold for the long-term. Don’t get distracted by small drops in the market (and never think about day-trading). Instead, check your investment accounts sparingly (maybe once or twice a month), and spend that extra time working so that you have more to invest.
5. Invest in Index Funds and ETFs, Not Solo Stocks
It’s amazing how quickly a thriving company can go out of business. To prevent your retirement from disappearing when your dream stock disappears, invest in buckets of stocks rather than single companies. As a whole, the stock market always goes up. You’re much safer betting on this than on individual stocks. So automate your savings and diversify your portfolio as much as possible – you’ll be thankful in your retirement years.
6. Pay Off Your Home
One of the easiest ways to prepare for retirement is to find a house you can afford and start turning those monthly rent payments into equity for your retirement days. Then, pay off that mortgage! Not only can this save you as much as 40% in annual expenses, but it also gives you an asset that can be tapped for additional capital in the future.
7. Develop a Stream of Residual Income
As a freelancer, you already have a skill that can be easily monetized. Why not use it to develop some type of residual income? Write a book, start a blog, or build a self-sustaining business. Embrace your flexible lifestyle to become a stay-at-home business owner or traveling entrepreneur. Create something that can make money without your constant involvement and you’ll continue to receive an income far into retirement. Finally, remember that you don’t have to be rich to invest like a millionaire – so start working on that residual income right away.
This article was created in collaboration with one of my friend Rob Erich, who is a writer, finance enthusiast, and avid traveller. He writes about the digital nomad lifestyle at MoneyNomad.com and discusses personal finance for InvestmentZen.com. You can connect with him on Twitter by visiting @MoneyNomadRob.
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