How Freelancers Can Start to Prepare for Retirement

Pretending that retirement will never happen to you won’t keep it from coming one day. For many traditional employees in the daily rat race there are 401ks and investments, social security payments and corporate pensions. This is all leading to that day when the employee chooses to throw in the towel and spend their golden years in leisure.

Most freelancers have none of those safeguards, but even if you do have all of that at your disposal there are no guarantees. The nightmare with the banks over the last decade has proven that. As a freelancer, you may have no benefits from your freelancing business that will prepare you for your final retirement later in life.

Because of this, you have to take your own steps to invest in your future (or at least have an exit plan). That exit plan should include retirement. It is never too soon to start, but there is such a thing as starting too late. So use the overview in this post to start your retirement planning.

(Editor’s Note: The information included here does not constitute specific financial advice and may not represent your particular financial circumstances. Check with your own financial adviser for the most current investment information specific to your own situation.)

Getting Started

First, what you need is a reality check. Think about what you have right now in expenses. Let’s say the amount is a modest $2500 a month in bills plus odds and ends. This is $30,000 a year, and doesn’t include taxes, unexpected costs and may (or may not) include savings.

Now take that $30,000 a year and you plan to retire at age 65, and live another 25 years. To maintain that level of expenses, without working, you would need $750,000. Some of this may be covered by social security and benefits payouts from past jobs. But it gives you a ballpark figure.

Now, take into account that dirty little word: inflation. Without getting too technical, this phenomenon will always ensure that any amount of money today will not be worth as much in the future. To find out the true value of $750,000 in 20 years, try this inflation calculator.

Panicked yet?

You don’t have to be. Modest living in combination with a good retirement plan can help cushion the blow for any freelancer. But you have to get started, so here are some picks for retirement investing.

Personal Savings Accounts

Guess what? Just having a savings account isn’t a retirement strategy. A personal checking account, no matter how high interest, offers no security and isn’t a good way to go about saving cash long term. However, they are helpful for saving up enough cash to invest higher amounts in other vehicles, or for short term saving separate from your retirement fund.

Retirement Accounts

Instead of savings, there are actual retirement accounts. There are several different types, and you can check each one to find what best works for your situation:

  • Standard IRA Accounts. An Individual Retirement Account (IRA) is a savings tool that puts a cap on how much you can put in per year, depending on your overall yearly income. The amount you can contribute varies when your annual gross earnings go up or down, so you won’t always put the same amount in–especially as a freelancer. You can set the IRA up to remove the amount of your contribution from your account automatically and leave it to mature. You can also deduct your contributions from your taxable income. You can make a withdrawal at any point after you reach a certain age, but it is best to leave it alone until you are sure you will be retiring for good or until you have reached the age where distributions are mandatory. Once you make a withdrawal it is counted as taxable income. Having an IRA is like delaying the taxes you will owe on your contributions. The benefit of delaying the tax is that you will earn interest that may be greater than the percentage you are taxed on when you do make withdrawals. This is called deferred taxation.
  • Roth IRA Accounts. A Roth IRA is similar to a traditional IRA, but a big difference is that the contributions are not tax deductible. You might wonder what the benefit of this could possibly be. Well, even though the contributions are not tax deductible, qualified distributions are tax free. This allows you to make withdrawals without paying tax on the interest. This investment may, or may not, be better than having a traditional IRA.

Non-Account Investments

Not all investments are made through a retirement account. Some are more straightforward than that, acting as more tangible items that you can hold on to until you retire. Some of these are more high risk than others, however, so it is important to know what each one can do for you.

  • Stocks. The reputation of the stock market has really taken a dive in the last few years. The economic crisis brought financial ruin to many, and playing fast and loose with stocks can seem like a huge risk that offers no security for the future. This is due to the fact that the value of a company will increase or decrease based on actions, products, rumors and future predictions. There is no way to find a sure thing with stocks, which is why many people choose not to invest in stocks. However, there are some steady companies that are much safer to invest in. They are those companies that maintain the same general growth and whose profits don’t fluctuate too drastically. If you invest with one of these you probably won’t earn huge profits, but you probably won’t lose your investment either.
  • CDs. A Certificate of Deposit (CD) is a low risk investment option that many people choose to go with over a standard or money market savings account. You put your investment–the minimum amount varies depending on the institution–into a CD for a specific term of time. This period of time could be anywhere from a month to five years. You cannot touch your investment during that time. This allows your CD to mature with interest. Generally, the risk of an investment decides the final outcome. Higher risk equals higher potential profit. If you just want something you can’t touch that will earn you a bit of profit, CDs are a good option. It is especially good for compulsive spenders who have trouble saving.
  • Bonds. Buying a bond essentially means that you are loaning your money to the government, to a bank, or to another institution. There is a fixed interest rate placed on that loan, just as with any standard loan agreement. At the end of the loan period you receive your money back plus the fixed interest when you present the bond.

Why Less Isn’t More

None of these options above are going to bring much of an immediate payoff, but rather they save your money for you to use in the future. The way to get a better return on your investments is by diversifying your portfolio. Use all of the options above together, or just use several at once, and you will increase what you earn while keeping your investments spread out enough to do more work for you.

Of course, if this seems like a lot of stress and effort on your part, you always have:

  • Mutual Funds. When you invest in a mutual fund, a team of professionals manage your investment for you. They divide your investment between various instruments to help you match your retirement goals. This assistance leaves you free to focus on other things, knowing that your savings are in the hands of trained financial advisers. However, be sure to do your research and read the fine print to see what fees you will be charged and to learn of any other specific terms.

Freelancers Need Financial Security Too

You are on your own when it comes to your future. That is one of the cons of living the life of a freelancer, even if the pros of the freelancing lifestyle undoubtedly outweigh it. Investing now will pay off later, so get started. There are plenty of low risk options that will keep you safe while letting you prepare for retirement.

Your Turn

Are you planning for retirement?

Share your thoughts in the comments.


  1. PixelPusher says

    Helpful article, and with really valid points. The sad reality is that a lot of people, especially Gen-Y people, probably won’t ever be able to retire. Plain and simple.

    If you start saving up at 25, retire at 65, you’d have to put away $1500 every month to reach 750k And that doesn’t account for the one doomsday reality you slipped in…inflation. Using a simple inflation calculator, 750k in 20 years becomes 1.6 million. So, yes, someone who is 25 now would need to retire as nearly a multi-freaking-millionaire in order to survive an additional 20 years past 65. $1500/month then becomes $3000. If a person needs 30k a year to get by, and needs to put away 36k more to retire in 20 years, then no one making less than 66k a year at 25 can likely retire at 65.

    Literally no one I know could afford to do this. Look at the reccession. Look at OWS. Look at income distribution. A delightful NPR program I listened to the other morning said that 47% of Americans are at or under the poverty line. That’s about 20k a year. 20k vs. 66k = big difference. Same program said there are only enough jobs right now for 1 in 4 umemployed people. They also said the average worker with a degree in the US makes about 40-43k a year. With taxes, $2500 per month in bills, putting away $3000/month is impossible. IMPOSSIBLE.

    Personally, I recommend a ton of investments. The kind that exponentially add to what you put in. I suggest a solid job with pension or 401k. I suggest IRAs, even though most people can’t put that much into them. I suggest paying into social security, even though it’s a gamble and it could be eradicated in 20 years. I suggest small ventures on the side. I know of one person who made 15k in a year selling crap on eBay, and that was on top of a full-time job.

    Do anything you can. But remember, you only live once, and you’re only young once. I’d almost rather travel and have fun now, then be screwed when I’m 65, as opposed to being miserable now, then having comfort and being unable to do much as a senior.

  2. says

    I never impress easily but really I got some true good stuff here and this make me impressed in a minute. Highly appreciated the hard work you did to make this article amazing. Already I bookmarked this URL and must I’ll back here to catch your great job. Keep it up.

  3. RustyH says

    Pay off mortgage and grow a garden. This has saved me $2000+ per month. Plus the added benefit of knowing if times ever get tougher, I will still have a roof and a meal for my family.

  4. says

    Good article to generally break down what each of these options are, since to me its all like a foreign language. There are also some REALLY good points in PixelPusher’s comment as well.

  5. says

    Awesome tips and probably every person’s dream, to be able to retire nicely. That would be in a perfect world.

    A good way to start is by being prudent in spending. Do not buy more than you require, eg. no need to replace that iPad just because the new one just came out.

    Use some of that savings to invest in opportunities with future return gains. Eg. If you have a studio, try to own it. Beats paying rent at the mercy of the landlords. Properties are always a hood hedge against inflation and you can always sell it when you decide to cease business.

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