Saving for Retirement in a Freelance World

Traditional jobs come with traditional conveniences. Taxes are taken from paychecks, retirement accounts are available, and benefits, bonuses and raises are usually on the table. These comforts have lots of appeal, and the majority of people enjoy some form of this lifestyle.


That majority, however, continues to shrink. We’re up to about 30% of workers identifying as freelance or independent contractors. The tech trajectory makes it looks like that number will continue growing in the decades to come, and that means more and more people will be looking for ways to replace the benefits that come with a traditional 9-5 job.


At present, too many people are ignoring retirement, health insurance, and all the other job perks that really need to be accounted for in one way or another. The number of adults with no IRA or 401(k) continues to grow, and that’s something we should all be worried about. If those of us in our 30s and 40s reach our 60s and still don’t have savings, that’ll be a huge drain on society as a whole.


If your paychecks arrive in irregular bursts and you feel the month-to-month straight, I sympathize. Nevertheless, you need to set money aside even when you feel like you can’t afford it. You’ll have to shift how you think about money and how you view your earnings, but it will be worth it when you start slowing down and thinking about working less.


It’s not enough to urge people to save for retirement; let’s figure out the tactics that can make retirement savings a reality. There are plenty of ways to go about it, you just have to find a method that works for you and then stick to it.

How To Save

It’s no use telling you where to put your money if you feel like you have no money to spare. Freelance work often seems like feast or famine, and no one can prioritize retirement savings over feeding a family or heating an apartment.


The solution is to become very purposeful with your spending and saving. When those paychecks arrive and you start allocating funds, you need to set clear jobs for all your dollars. Start with those pesky bills you can’t do anything about:


  • Rent
  • Groceries
  • Gas
  • Bills
  • Insurance


Then move on to those annoying expenses that plague every freelancer:


  • Tax savings
  • Supplies
  • Marketing


You’re probably looking at this list, feeling overwhelmed and questioning how you’ll ever eat again, much less save for retirement. Don’t lose hope! Attitude has a big effect on how you spend and save, so you need to adopt a can-do philosophy if you want to make this work.


Identifying unavoidable expenses isn’t particularly fun. Tax costs are a big deal with freelance workers, and there’s not really any way around it. If you don’t save throughout the year, you’ll like get blindsided with a massive bill when you file your returns. This means you either lose a couple month’s worth of earnings or you take on a bunch of debt, and neither of those options is very good (with option two being particularly bad).


I know we’re talking about saving money, and paying taxes probably feels like the opposite of that. However, if you pay quarterly, or at least set aside part of each paycheck so you have money available when the IRS comes to collect, you get ahead of the game and put yourself in a position to save.


This is the same concept as creating an emergency fund before you pay down your debt. Having funds available for big expenses allows you to avoid debt, and that makes it possible to save more in the long run. Your short-term brain might not like the idea of putting 20% of each check into a tax fund, but your long-term brain will be thrilled with that decision.


Once you’re taking care of all these other financial obligations, you can start setting retirement savings goals. For those with an employer-sponsored account, this part is easy - let 6-8% of your pre-tax earnings go into your 401(k) or IRA. For the freelance workers collecting small amounts from numerous clients, you have to put a little more thought into it and come up with a plan.


Setting a specific goal will give you a lot of direction when figuring out your saving strategy. Don’t worry about what’s realistic at first, as you might sell yourself short. A good approach is to start at the end and work backward; do some Googling and see what analysts estimate people need for a comfortable retirement (everyone’s different, so take those stats with a grain of salt). Once you find a number that seems reasonable, do some math: how much do you need to set aside each month to reach that goal?


You might come up with an amount that isn’t realistic, and that’s fine. This is a goal you’re going to work toward, and just because you can’t save $1,000 each month doesn’t mean you shouldn’t save $200 if that’s all you can afford. Aim for $205 the next month, and $210 the month after that. Money will keep growing and you’ll keep earning, and making the effort will eventually get you where you need to be.


As you work toward a goal, it should become easier to cut unnecessary spending. Make sure you’re putting money aside for unavoidable expenses and then do your best to stay focused on the future.

Where To Save

This is the fun part, assuming you take the time to make educated decisions. As long as you don’t go with underperforming mutual funds or bet your monthly savings on an iffy penny stock, chances of your money growing and compounding are very solid.


So how does these educated decisions get made? If no one is going to tell you where to put your money… where should you put your money?

1. Savings Account

Scared off by the variety of options? There’s always the good ol’ savings account. This is one of those options I throw out in an effort to make sure you do something instead of nothing. Interest on a savings account or a CD isn’t going to be impressive, but your money will stay liquid and you don’t have to worry about a dip in the market causing your account to bottom out.


Let’s look at it this way: say you have three choices. One is to do nothing, to not set money aside, and to continue living month to month without growing your wealth. Option two is to go with a mutual fund you don’t understand, with subpar returns and loads of hidden fees, run by a person you don’t know or trust. This option requires a little more effort than the first and could leave you with very little to show for it.


The final option is to put a couple hundred dollars into a savings account each month while you learn a little more about investing. If my disdainful writing in the above paragraph didn’t tip you off, this is the right choice. It might not be a great option, but a savings account is still a good bet.

2. Brokerage Account

Did you know that most retirement accounts invest in stocks and bonds? You probably did. Did you know that you can buy your own stocks and then just call it a retirement account? It’s a pretty simple concept, but lots of people still have trouble wrapping their minds around it.


If you want to have more control, don’t trust fund managers, or you’re playing catch up and want to invest more than the maximum allowed by most retirement accounts, you can set up a taxable brokerage account and allow your money to grow that way. While many people view the stock market as volatile and a poor investment, that’s where your retirement money would be going if it went through a big firm.


I think stocks are a great investment tool to be used in addition to an IRA or 401(k), provided you invest responsibly. You don’t have to be an insider to make money over time in the market, you just have to invest in good companies and then leave your money alone while the shares increase in value.


This is another good way to keep your money liquid, making it easy to move dollars around and change your investment strategy when need be. You can also work with a manager who isn’t constantly buying and selling shares and charging you trading fees, which is what happens with far too many mutual funds.


While you’re free to trade as you see fit, owning a stock for upwards of a year accomplishes two important things. First, you give the shares a chance to grow. The market historically trends upward with the occasional rough patch, so treating stocks as a long-term investment is the best way to make money off them.


The other benefit relates to short- versus long-term capital gains tax. If you sell stocks within a year of purchase, you can get taxed at the rate of your normal income tax. If you hold onto those shares for over a year, the long-term capital gains tax kicks in and caps fees at 20%.


You don’t have to take big risks when you invest in stocks, no matter what you’ve been led to believe. You can invest your savings in shares of solid, dividend-paying companies and watch your wealth grow. Definitely get some advice before diving in, but consider this a worthy option for your freelance retirement savings.

3. IRA

I’m fine with options one and two, but I’d prefer you take this route. You can get a good IRA through any number of companies, allowing your funds to be invested in numerous markets and industries while bringing in a decent return. You don’t have to go through an employer, you just have to make sure to contribute.


I’m a big fan of self-directed IRAs, where you do a little more than just siphon money into an account and then hope someone manages your funds properly. This option provides a little more control, and also allows you to include real estate, precious metals and personal mortgages, among other alternative investments, in your retirement account. You still have the option to go with a Roth or traditional IRA and you can use the money for certain expenses without incurring a penalty.


People with sponsored 401(k) accounts often role those funds into IRAs when they change jobs, and it typically works out well. Some financial institutions offer better plans than others, but it shouldn’t be too hard to find an IRA that meets your needs.


One of the biggest advantages of an IRA over individual stocks comes from when and how you contribute. You can kick money into your account each month, every other month, whenever you have the money to set aside. Once you’ve added the funds, an account manager will make sure they’re dispersed accordingly. This takes the decision-making pressure off your shoulders.


While you can add funds to your brokerage account at any time and in almost any amount, you still have to decide when you’re going to buy stocks and how many shares. In order to avoid paying too much in trading fees, you need to be pretty calculated and give each purchase a significant amount of attention. When bouncing between freelance projects and struggling to make ends meet, taking time away from work to study investments might be too much to ask; the IRA option will help ease that burden.


Once you’ve committed to a good retirement account, getting involved and watching your money grow can be a lot of fun. You’ll start working harder to save more and the visible results will help keep you motivated.

Why To Save

You know why to save. No one doubts the merit of saving money and using an investment account to grow wealth. And yet, so many people aren’t doing it. If we all know why we should save, why aren’t we saving?


There are obvious answers. Living is expensive and the cost of housing is downright outrageous in many U.S. cities. Student loan debt puts people behind the eightball before they get their first job. Medical expenses pop up out of nowhere and cause complete and utter financial upheaval. I’m not trying to pretend that saving is easy or that money grows on trees.


However, I do believe that it’s easier to dwell on the reasons we struggle to save than it is to focus on the ways we can make it happen. While a shift in attitude can’t boost your paycheck all on its own, it can help you find the means to improve your situation.


Freelance or otherwise, being financially responsible is as much a mindset as it is a condition of circumstance. You might think your frugal friends just have a better situation than you do or started with less debt, but they also put a lot more conscious effort into saving for the future. You get to decide how important saving is for you, and then you get to decide what to do about it. That doesn’t make things simple, but it does make them clear.


As soon as you commit to putting money away, even if it’s just five dollars a week, the shift begins; saving for the future starts to change from a distant concept to a habit. This alteration in your lifestyle might start as a slow trickle, but once you see your debt dropping and your savings accounts getting bigger, it will feel like someone opened the floodgates.


After you experience the benefits of savings firsthand, you’ll never go back. When you’re able to cover an unexpected trip to the doctor or the mechanic without driving up your credit card balance, you’ll feel a type of freedom you’ve never felt before. Now, imagine that same feeling, but you feel it all the time. Every morning, you wake up and don’t panic about money, and you go about your day without worrying about earning and spending and saving...


...Because you’re retired. Years and years ago you started putting 10% of every little check away, and even though you didn’t know if you could sustain a freelance career at all, you made the choice to open an IRA and save what you could. It started slowly, then things picked up, and now you’ve got plenty of good years left and you don’t have to worry about money.


That’s why you save.


Today’s economy is built for freelance workers, doing everything from designing websites to painting portraits to building houses. There are plenty of reasons people seek out this type of income, but retirement prospects usually isn’t one of them. You might be working odd jobs and living for the moment, but that’s no reason to ignore your future.


If you haven’t already started, it’s time to make sure you have money going toward retirement. It doesn’t matter how much and it doesn’t really matter what type of account (within reason). As difficult as it might be at first, setting and achieving savings goals will make your freelance career more fulfilling, and life will be infinitely better when you decide it’s time to retire.