How should the self-employed save for their retirement (is it even possible)?



Self-employment is a tenuous approach to employment, made all the more so by a profound lack of conveniences usually offered by more stable arrangements – foremost is a retirement fund. It might seem impossible, especially when your business is suffering from a pandemic, so some of the following can be skipped until the ship doesn’t sink, but don’t wait a minute longer than that – okay?

So there are several schools of thought regarding how best to start saving and where to put your money, but the bottom line is that, if you are a freelance writer, you should allocate your own retirement funds. Here are a few ways to do it.

Before you even know how to invest in retirement, you should have a parachute in case things go wrong. My bank tracker suggest starting with an emergency fund of $ 1,000, adding as much as possible until you have between 3 and 12 months of expenses covered.

This serves two purposes: to make sure you have the luxury of time if you have to do a steep job search, and to establish how much you can safely put aside each month without jeopardizing your business or standard of living ( within reasonable limits).

It’s always good to have a relatively large amount of money on hand in an emergency, and if you never have to use it for the purposes you set it aside, it can supplement your retirement every day. once you decide it’s time to cash out.

My bank tracker also suggests store your emergency fund using a “high yield” bank account, like an online savings account, rather than sticking to traditional low-interest savings options.

You must also forecast taxes, which, in addition to the percentage of your tax bracket, includes allocating 15% of your income to paying for Social Security and Medicare. This means that you are probably setting aside quite a large amount (at least 30%) each month.

Once you’ve established your emergency fund and planned your taxes, you should have a general idea of ​​what your leeway looks like when it comes to retirement savings.

The real savings part of retirement involves investment in a retirement account such as an IRA, Roth IRA, 401 (k), or retirement plan (called a “defined benefit plan”).

Each of these account types has advantages and disadvantages depending on your situation.

  • A Roth IRA will allow you to contribute a certain amount each year, and you can usually set up an account quickly from various online locations. The money that goes into a Roth IRA is after-tax, which means you don’t have to pay tax on the retirement funds you withdraw. Your income, however, can keep you from investing – if you earn above a certain threshold ($ 140,000 in 2021), you won’t be able to use a Roth IRA.
  • Other IRA options also exist, each with a cap on how much you can contribute per year and varying tax requirements. For example, a traditional IRA account requires you to pay taxes when you withdraw money, and there is an upper limit on how much you can contribute.
  • A SEP IRA is similar, but the upper limit of the investment is significantly higher – and you have to be self-employed (or employer) to have one.

Nerd wallet also points out that a 401 (k) is a reasonable option for self-employed people who don’t employ anyone else, especially if you plan to save “a lot in some years – say, when business is booming – and less in some years. others. “401 (k) accounts allow you to put up to a certain amount ($ 58,000 in 2021) each year before tax, and you pay withdrawal taxes every time you start withdrawing money.

More eccentric retirement options also exist. Taxable brokerage accounts allow you to invest in stocks and securities through a brokerage house, and you can use the money whenever you want, but you will have to pay taxes on your earnings every year, which can become expensive in the long run.

And defined benefit plans are expensive and have high fees, but they allow you to build a pension with high investment opportunities as opposed to some of the low investment options.

Whichever option (or options – you can always invest in multiple accounts) you choose, be sure to save for retirement one way or another. And remember, these accounts are growing exponentially, meaning the sooner you start saving, the better off you’ll be when you begin your retirement.



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