Set up your system to save for retirement

In the last step, you created your self-improvement strategy with three skills to focus on for the year. Now, you’ll be looking a little more ahead into the future with retirement investments.

Depending on how old you are as you read this, retirement may still be but a distant twinkle in your eye. But even if you’re an eighteen-year-old freelancer just getting started, it’s very worth planning for retirement now. ‍

As a W-2 employee, you can plan for your retirement on autopilot. You’ll be putting money into a 401K, and some employers even match a percentage of your 401K investment. As a freelancer, you’ll have to do it yourself. 

Like with healthcare, retirement is different for everyone depending on location, marital status, and income level. My goal in this step is to walk you through your options so you can select the best Individual Retirement Account (IRA) for yourself. ‍

You might also want to consider hiring an accountant or financial advisor who can guide you on how much to save, and where you should put it. 

Figure out what type of retirement setup is right for you

Roth IRA

If you’re just getting started, a Roth IRA is a good option for you. A Roth IRA is an individual retirement account where you can put your after-tax dollars. This is a great option for early-career freelancers because you don’t have to pay tax on this money as it grows, nor when you withdraw it. And guess what? Right now, you’re probably paying a lower tax rate than you'll when you retire.

The rules are simple – you can put in $6,500 a year, or $541 a month if that’s easier for you to parse. You can start taking money out of it without paying any penalty or taxes on it when you’re 59 ½ years old, as long as the account has been open for at least five years.

‍Tip: It’s worth mentioning that if you or your household are earning more than $228,000 a year, you can’t contribute to a Roth IRA at all.‍

Traditional IRA

If, for whatever reason, you believe you’ll pay a lower tax rate when you retire, look into a Traditional IRA instead.

‍For example, say Elena lives in Boston. She and her husband earn $200,000 per year and plan to retire to Spain, where they’ll take out ~$50,000 per year to live. They will probably be taxed at a higher rate now than when they retire, so a Traditional IRA makes more sense.‍

SEP IRA

If you want to put in even more money for retirement, you may want to consider a SEP IRA, which allows up to 20% of your annual net income. It’s tax-deductible, but you’ll pay taxes on the money once you start withdrawing income.

Solo 401(k)

Finally, you may want to look at a Solo 401(k), which is similar to a SEP IRA. It’s only available for freelancers who do not have any eligible employees, so it’s best for early-stage freelancers rather than agencies.‍

It’s the same set of conditions as a SEP IRA, plus a lot more paperwork.

I know that financial options around retirement can be a hassle to read through. If you want the TL;DR version, I offer a couple of webinars that might be useful:‍

• Retirement and Investing for Freelancers. How to pick the best retirement accounts, how to build retirement planning into your monthly accounting, what it means to invest and how you can get started, how to roll over a 401K from a previous job, and more.

• Financial Management for Freelancers: A Masterclass. How to maintain your baseline, how to grow wealth strategically, when it’s time to scale, and how to use your finances as a tool to build the life you want to live.

We all want to save, but make sure your plan is feasible

Most importantly, you need to make sure your retirement goals are feasible for your current lifestyle. It might sound awesome to put $15k in a tax-deductible retirement account, but that’s only if you can afford to do so. ‍

For example, say Sara wants to invest the full $500 per month into a Roth IRA. She needs to plan now how she will get that money. Is it coming from clients? Is there a quality-of-life adjustment she needs to make to ensure she can afford that? She may end up choosing a more cost-effective course for improving her copywriting skills and putting the remainder of her self-improvement budget toward retirement. ‍

There are a few ways to streamline retirement planning. First, once you’ve figured out the maximum it’s safe for you to contribute every month, set up an auto transfer. Then you can stop thinking about it until it’s time to cash out. 

MyBankTracker offers a great guide on how to start thinking about saving for retirement. I also like NerdWallet’s guide to your various options. And if you need an idea of how much to save, NationalLife’s calculator does a good job of giving a rough estimate.

Make your retirement to-do list

Ready to start on your retirement planning? It’s time to make a retirement to-do list. 

Track your expenses for six months and study your spending and saving patterns. Tools like Copilot are very helpful to do this quickly. Be hard on your budgeting to see what you could cut. In your margins, what can easily go? For example, could you choose not to go out to dinner for one month? Start small. When you notice income jumps, revisit your goals and reinvest.

Write down what you think you can manage to do right now as a way to start planning for retirement. Example tasks include:

• Creating a savings account to put money into 

• Setting up a monthly auto-pay

• Researching what it might look like to open a ROTH IRA

• Cut spending at restaurants by ___ a month

• Hiring an accountant

‍This list will look different for everyone depending on your financial status and how ambitious your goals are.

Recap

In this step, you gazed into your crystal ball and invested in your future retirement.

• How much are you setting aside for retirement?

• Which retirement plan did you choose? Why?

‍In the last step of this playbook, you’ll be wrapping up Steps 1-7 to create your very own Freelance Benefits Package.