Are You Saving For Retirement?

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on April 12, 2010 in Finance
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The lack of employer-sponsored retirement plans is another drawback of freelancing and self-employment. But just because you don’t have a corporation matching your 401K contributions doesn’t mean you should forgo retirement savings all together. Sure, freelance writing is flexible, but do you really want to continue doing it for the rest of your life? Can you do it for the rest of your life?

During retirement, you’ll need anywhere from 70% to 95% of your annual pre-retirement income. Of course, that depends on your financial situation when you retire. You’ll need more money during retirement if you still owe a mortgage or car loan, credit card, or student loan debt. Planning is key.

The Sooner the Better

You’ll always have a reason not to save for retirement. Making retirement savings a priority in your 20s and 30s gives you much more time to save than when you’re in your 40s and 50s. For example, if you want to save up $1 million by age 65, you need to contribute $2,259 each year if you start at age 25; $6,079 each year if you start at 35; and $17,459 a year if you wait until you’re 45 to start. (Source: ClarkHoward.com)

Contributing to a retirement fund can be more difficult as a freelancer because you don’t get the advantage of having your contributions automatically deducted from your paycheck. Instead, it’s up to you to transfer money into your retirement plan or find out whether your plan administrator has an option to automatically draft the money from your checking or savings account. Then, you have to make sure you have enough money in your checking account to cover retirement.

If you can’t figure out how to add retirement savings to your current spending, take out your budget to see if you can make room for it. You may not be able to contribute the same amount each month, especially during famine months, but you can make quarterly or annual retirement saving goals.

Tax Benefits of Retirement Savings

You’ll also get a tax benefit for contributing to retirement. You can generally take an above-the-line-tax deduction for your contributions to a retirement plan. An above-the-line deduction can be taken even if you don’t itemize your tax deductions, but only your federal tax liability is decreased. Above-the-line tax deductions don’t decrease your self-employment tax.

How to Save for Retirement

You can research retirement plans and open one on your own, or you can hire a financial planner to explain each of the retirement options and help you decide which plan is right for you. Beware, there are some financial planners who make a commission based on the financial products you buy and may push you in a certain direction. Other financial planners are paid a flat-fee regardless of which financial product you invest in.

Stay tuned. The next post will discuss retirement options available for freelance writers.

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LaToya Irby is a full-time freelance writer and a graduate of the University of Alabama. She primarily writes about personal finance, freelancing, and other self-employment topics.

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5 Comments

  1. Rebecca Garland April 12, 2010 Reply

    This is one of the (minor) reasons I still like to teach while also writing. I don’t pay into Social Security as a teacher and unless they change the code, I won’t be able to pull my share of my husband’s social security at retirement age. I have a separate teacher pension thing that I pay into through Teacher Retirement System (TRS) and I pull a few hundred extra each month to put into a special teacher fund called a 457k (I think – not going to check at the moment).

    When I hit “85″ (the combined total of age and service – currently about age 54) I get to retire with a nice monthly check from TRS, plus additional funds from my 457 and I have some left over from a Roth IRA I should be doing more with. At that point, I can supplement with the writing in between weeding my garden and yelling at kids to get off my porch. Or traveling or whatever I want.

    The boys head off for college when I’m 43 and 45, so I’ll have 10 years or so of planning what to do with myself at that point. The idea of a doctorate and teaching at the university level just flits about in my head for some reason. I just take care of business as much as possible now and enjoy this phase.

  2. Dan Smith April 13, 2010 Reply

    I’m lucky (or unlucky, depending on what day you ask me) to work in the corporate world at the moment, whilst also having a freelance writing career.

    I don’t currently pay into a fund for retirement for my freelance writing, but I do for my corporate work, paying in 5% and having it matched by my employer.

    One of my goals is to leave the corporate work behind soon and concentrate fully on my writing work – but I still don’t plan on putting any savings into a retirement fund, as such. At least in cash form.

    My idea is to diversify my income streams to an extent, albeit within my relative comfort zones, to be able have a residual income available to me not only in retirement, but before, as well.

    I have a small business consultancy that I’ve been running for a few years, but I’ve stripped back the number of clients I’ve got to a minimal amount recently, primarily as I’ve been taking on more and more writing clients. There is the scope to increase substantially, with is something I’d like to do in the coming years and get the company to a point where I can hand over management to someone else.

    Similarly, I’ve (or we’ve) got plans to move out of our house into a bigger one in a few years, but rather than sell our current house, our idea is to rent it out. Move house twice more after that and that’s 3 houses earning, as of today, a total of around £2,000 a month (that’s gross, but even with a few hundred pounds worth of deductions, it would still clear around £1,500 a month for effectively doing very little – that’s not meant as an insult to any landlords, but by the time I hit retirement age, I hope I’ve got the whole management side down to a fine art).

    I’m not under any illusions that this could all go awry and I could be left with only a minimal pension fund. I don’t think the statutory UK pension will be in place by the time I hit retirement age, so I’ll no doubt put some money aside for a rainy day. I guess I just don’t like the idea of relying solely on what would effectively be savings.

    But then I’ve always tended to go against the grain and maybe this is a time when I should be looking to put some cash aside.

  3. Jim Lochner April 13, 2010 Reply

    Let’s just say I’ve made some STUPID, and long-reaching, financial mistakes over the last 25 years or so. So at age 47 I’ve just NOW started pulling together some money for savings for the first time. I have some money in a 401(k) from my old fulltime job. It took a big hit when the economy went belly up (and there wasn’t much in there to begin with), but so did everyone else’s. It’s now slowly building back up. Since I have no intention of returning to fulltime office work, I’m not sure what I’ll do with that yet. Roll it over in an IRA or something.

    I’m not sure I’ll ever have the money to retire, and at this point that’s okay. It took me all this time to finally find and settle into a freelance career that I truly enjoy. If my heart gave out at my desk, I’d be okay with that. (Then again, ask me in 20 years if I feel the same way. LOL) But to have the piece of mind of extra money in the bank and a retirement fund would go a long way to keeping that heart healthy. And so I build up the reserves as best I can. Many people will do far better than me, others worse. But it’s not a race and I’m continually learning day by day how to manage my money and finding ways to implement new income. Those are HUGE steps forward from where I was even a year ago.

    Life is a learning process. And I’m trying to follow Steve Winwood’s advice, “Roll with it, baby.” :)

  4. Issa April 13, 2010 Reply

    I think many people have misconceptions about freelancing and yes, I agree with you that one of the pet peeves is not having a retirement benefit. So, as they say, one must always save for the rainy days. With the freedom of working anytime, anywhere on any project comes a huge responsibility for oneself. I guess, labor laws can be written to protect the rights of freelancers? Don’t we have a freelancer’s union for this? I wonder what the new health care plan will truly give freelancers of today. Thanks for the sharing!

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