Not long after quitting my office job to work for myself full-time, I ran into an acquaintance on the street. In her early sixties, she'd been working as a freelancer her whole career. I excitedly shared my news with her, expecting congratulations. Instead she shot me a grim look. "After freelancing my whole life," she said, "I don't have a dime saved. I have no idea how I'll ever retire."
I smiled sympathetically, politely, pushing the panic that crept up inside me down as best I could. Like many freelancers, I hadn't thought much about retirement savings. Having an emergency fund to fall back on and decent health insurance seemed sufficiently responsible. But thinking all the way ahead to the end of my career?
It's easy for freelancers to forego thinking about the long-term future in lieu of short-term planning. Easy, but dangerous. "Successful freelancers and entrepreneurs tend to fall into one of two categories," writes Jonathan Medows, a CPA who specializes in taxes and business issues for freelancers. "Those who made money, made a difference for others, and remain financially stable; and those who 'live in the moment' and never achieve long-term financial security."
Having a long-term financial plan is critical for all freelancers and entrepreneurs, especially if you're in it for the long haul. But where to begin?
The earlier you start saving, the better, of course. Waiting until 30 to start saving rather than starting at 25 can mean the difference of more than a $100,000 in savings, even if your starting salary is around $40,000, according to Fidelity Investments.
Fidelity recommends that by age 35, you should have saved the equivalent of your current salary. By 45, that should go up to three times your salary at the time, and by 55, five times your salary.
An easy place to start building retirement savings is to open an individual retirement arrangement or IRA. You've heard of the two most popular—Roth and traditional IRAs. A Roth IRA invests after-tax dollars that you won’t pay taxes on down the line, whereas a traditional IRA invests pre-tax dollars that you'll have to pay taxes on when you withdraw your money.
While a traditional IRA can save you on taxes now, you won't be able to touch that money without paying a penalty until six months after your 59th birthday. A Roth IRA, on the other hand, lets you pull out contributions much sooner should you find yourself in a financial bind or in need of money when buying your first home.
With the maximum IRA contribution for people under 50 set at $5,500 a year, that would break down to about $458 a month toward your IRA, if you want to meet that maximum.
But you don't need to shoot that high if your budget won't allow it. According to Sophia Bera, a financial planner who works with clients in their twenties and thirties, if you save $200 a month for 40 years and earn an average of 7% interest, that could bring your savings to more than $500,000.
The IRS offers a rundown of retirement plans for the self-employed including an SEP (Simplified Employee Pension) or individual 401(k).
Breaking into a comprehensive retirement savings plan can be daunting, but start small and soon and you'll feel empowered build your nest egg bit-by-bit.