What Modern Freelancers Need to Know about Retirement

The changes caused by the increased use of technological innovations are introducing new trends in the labor market. Job security is dropping and uncertainty is becoming the predominant trend. As of November 2016, the unemployment rate in the US was about 4.6%, according to the report published by the U.S. Bureau of Labor Statistics.

Some people might say it’s nothing to worry about.

However, translated to millions, it comes up to about 7.6 million American citizens without a job. Those people don’t even have a chance to create a retirement plan. When you know that 56% of working Americans have saved less than $10,000 for retirement, you get the picture of the bleak perspective of US workers. Also, bear in mind that here we’re talking about the most powerful country in the world. We can only imagine what it is like in developing countries.

With all this information in mind, it’s crystal clear that freelancers have to turn over a new leaf and show some responsibility for their future. Relying on the government or other people is a childish attitude towards life. What you need to do is take the bull by the horns and decide how you’re going to be saving for your retirement over the next few decades.

State-employers mind games

Retirement plans and the future of pension funds are the burning issue between the state and employees. The USA has always had a somewhat different approach to employees’ pensions than European countries, for example. The government has supported a pretty individualistic and self-reliant lifestyle for ages. That way, employees were encouraged to take care of their lives and plan their future.

However, the economic crisis of 2008 has altered the rules. The US Government, famous for its zero interventionism policy, decided to offer state bailouts to private funds and companies. This exception has caused concerns both in the federal administration and in private business circles. As a result, today the state has a stronger influence on the economy.

Employers, on the other hand, are trying to reduce the interference of federal administration in the once-free market. Since there are plans for even greater role of the state in future retirement regulations, freelancers should prepare for different business rules. Does this mean that we’ll be able to rely on state pensions in the future? Not really.

Social Security and future pensions

As the NASI report from August 2016 shows, 84% of the Americans aged 65 or older receive pensions from the Social Security funds. To be more precise, it’s about 40 million people. Moreover, about 33% of all the pensioners receiving a Social Security check don’t have any other source of income. So, if you’re a freelancer who thinks it will be possible to live off your Social Security pension when you reach old age, it’s a far-fetched expectation.

The amount of your monthly pension income from Social Security will depend on your average salary you will be receiving during your career. That way, if you retired in 2016, at the age of 65, and your average income was a medium salary – about $47,000 – your annual pension would be about $18,500.

Moreover, a pensioner with a career-average salary of $115,000 a year would stay a few hundred dollars below $30,000. As for a low-income pensioner, with an average annual salary of $21,500, they would be assigned about $11,200 per year when they retire. Of course, if you decide to retire before you reach the age of 65, your retirement income would be even lower.

Plethora of retirement funds

As you can see from the previous paragraph, people retired this year will face a serious decline in their living standard. For instance, an average annual salary of $47,000 isn’t considered a poor income in the USA. Still, your pension will be as low as $1,500 a month.

If the situation is like this today, who knows what we can expect from the future. So, while freelancers shouldn’t neglect the state-governed retirement funds, they should also create a detailed plan for their individual savings, so that they don’t depend only on one source of income when they retire. Namely, they need to devise a smart plan to create ample retirement funds.

Here are the most common options for modern freelancers.

  • Savings account – The simplest form of saving money for the future, putting money to your savings account has both benefits and drawbacks. On the one hand, you’re not exposed to high risks and you can make some money along the way, due to interest rates on savings. Still, don’t expect any high incomes here, since those rates are dropping. On the other hand, your money will be lying unused and you might waste an opportunity to make more assets for the future.
  • Individual 401(k) – The most common retirement plan for self-employed people and small business owners in the USA, the Individual 401(k) is still the safest lane for freelancers. This option is useful for a number of reasons. Firstly, your money is transferred to your account before the taxation. That way, you can reduce your present-day tax obligations. Secondly, you can invest as much as $18,000 a year. Also, 50-plus-year-olds could increase their contributions up to $25,000 in 2015. Nevertheless, you still have to pay the taxes, but at the withdrawal, when you retire. Moreover, if you need your funds before you retire, it doesn’t mean you’ll have to pay penalty fees. It depends on your age and the personal situation, as you can learn here.
  • Roth individual 401(k) – As opposed to the Individual 401(k) plan, here you make plan contributions after your salary has been taxed. The limit for your payment is $5,500 for people under 50 years of age. On the other hand, if you’re 50 or older, the limit is $6,500. While the Individual 401(k) plan is better for freelancers with medium salaries, the Roth Individual 401(k) will suit better to people with higher incomes. By using this plan, your tax payments would be sorted out during contributions.
  • SEP (Simplified Employee Pension) – This plan allows you to make contributions that don’t exceed 25% of your annual net income. Just for your own orientation, the limit for contributions made to this plan is $53,000 for 2016.

Life insurance as a retirement asset

In addition to those retirement-specific plans, some people decide to add a third layer of protection for their old age – a life insurance policy.

In addition to the Social Security income and the retirement plan, life insurance can be a great assistant in the process of amassing your retirement assets. Still, you should never rush into such a deal. For starters, you should know there are two main types of life insurance: term life insurance and whole life insurance.

The former is agreed for a particular time period. You can withdraw the assets even before the contract expires, but you’ll have to pay some penalties. On the other hand, in case you die during that period, your beneficiaries receive the agreed sum.

Whole life insurance, on the other hand, provides more benefits for the insured party. However, it’s also a riskier option. For instance, if you keep paying this policy for 50 years, your closest relatives might not live long enough to be your beneficiaries. While the premium remains the same throughout the agreed period, you don’t know who will benefit from it.

Therefore, term life insurance should be used as a leverage to accomplish some short or middle-term goals. Whole life insurance, on the other hand, can be used as an addition to your retirement plan, but you won’t be able to use it for obvious reasons. It will just bring retirement benefits through some deductions.

Staying out of debt

An average US household owes about $5,500 on credit cards. When you have to cover debts on one or more credit cards every month, you certainly waste at least $50 on interest rates on monthly basis.

What’s more, many households waste hundreds of dollars on those rates. So, if you’re a freelancer and you know that your income may vary, stay away from such deals. Yes, you might not be able to afford every single thing on the spur of the moment. However, if you think about the future, you’ll realize that it’s better to save money and buy a new TV or a car when you have enough cash. Moreover, the money you’d waste on interest rates if you took a cash loan to buy something should better be invested in your retirement plan.

In addition to that, if your partner does the same, you’ll establish and rational financial paradigm. Instead of indulging in short-term pleasures, you should take care of your future. Besides, you won’t have to make any heavy sacrifices, like not buying new gadgets or other items. You’re just going to do it in a planned and reasonable way.

Finally, the rule of thumb when it comes to debt is that the mortgage is the only completely justified personal loan. All other personal loans can be avoided if you organize your finances in a better way.

Developing saving habits

Your retirement plan will mostly depend on your basic income. However, freelancers should never rely solely on one source of income. For instance, one month you can make $10,000 and then you might not have a new project for months. This is why it’s crucial that you put more money aside when your freelancing venture is on a winning streak.

Just like our grandmas would say – you have to save money when you have some.

In line with that, try to keep away from shiny little pearls that are luring you into spending more money than you’ve planned. Moreover, instead of eating out, prepare meals at home. If there are two or more of you in the household, it pays off even more to eat at home.

Let’s say an average budget meal costs $10. If you eat out only ten times a month, it’s $100. Calculate the fuel and the parking expenses for those trips and you get somewhere between $150 and $200 per person. It sums up to about $2,000 annually. Over a course of years, you might waste an entire retirement fund on chicken nuggets and soda drinks. And that’s only one example of bad spending habits.

So, if you want to establish a better control of your monthly expenses, start using one of the expenditure tracking apps. They’ll give you a better insight into your budget leaks and help you save more money for your retirement funds.

Learning new skills

Even if you follow all the guidelines given by finance pundits throughout your career, it might still happen that your pension funds collapse by the time you reach the retirement age. All right, this might be too bleak a prediction, but there will certainly be many changes in the decades to follow when it comes to the retirement law.

Because of that, every freelancer needs to commit themselves to lifelong learning. The openness to new ideas and eagerness to learn new skills will keep your mind in good shape. When your brain is fresh and able to learn, you’ll always find a way to make some extra money.

As an appendix to all the analyzed options for economically independent retirement, it’s vital that both freelancers and all other workers expand their fields of expertise. When you’re proficient in doing different works, you can monetize those skills. Speaking from this point in time, a teacher can make tutorials and post them online. They can start with free lessons and gradually make some money.

Similarly, craftspeople can follow suit. Carpenters, wall painters, bricklayers – they can all show the world their practical skills. On the one hand, you’ll always have an additional source of income when you retire. On the other, you’ll also have a chance to make more money for your retirement plan even while you’re still an active freelancer.

The world is rapidly changing and new generations already feel those changes on their skin. They’ll have to take a much more responsible attitude towards financial planning than some previous generations. What’s more, the number of freelancers is growing, which generates new considerations about the nature of financing pension funds and their future existence.

Having the right retirement plan for your type of business and income is the most important prerequisite for a safe financial future. For all these reasons, analyze the options presented in this piece and find the best solution for your current position.

Mark Thomasson
Mark is a biz-dev hero at Invoicebus - a simple invoicing service that gets your invoices paid faster. He passionately blogs on topics that help small biz owners succeed in their business. He is also a lifelong learner who practices mindfulness and enjoys long walks in nature more than anything else.
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