The freelanced retirement

October 19, 2010

Freelancers may be outstanding at many things. E-mailing a project while interviewing a source and dealing with a screaming two-year-old, all at the same time? Fantastic.

Retirement saving? Not so much.

“Freelancers are pretty horrible at saving for their future,” says Denise Kiernan, co-author (with husband Joseph D’Agnese) of The Money Book for Freelancers, Part-Timers and the Self-Employed. “It’s a challenging life. Sometimes checks come in, sometimes they don’t, and it’s hard to get into any kind of money-management rhythm.”

It’s not just a fringe concern: Independent workers now make up a full 31 percent of the American workforce, or more than 42 million people, according to the federal Government Accountability Office. With the ongoing economic churn of the Great Recession – another 95,000 jobs were lost in September, even as the economy supposedly recovers – the ranks of solo workers are only growing.

And without a company 401(k) to sign up for, freelancers are essentially walking a tightrope without a net. There are a number of savings vehicles designed for the self-employed, but you have to dust them off and start deploying them. Kiernan’s favorites: A two-punch combination of a Roth IRA and a SEP-IRA.

“Most freelancers haven’t been saving at all, so it’s best to keep it simple,” says Kiernan, who boosted her financial IQ the hard way, as a longtime freelancer herself. “With a Roth and a SEP, you can get an awful lot of good saving done.”

Teri Cettina REUTERS/Handout

Teri Cettina

A Roth is an individual retirement account that takes after-tax contributions, to a maximum of $5,000 a year for those under age 50 ($6,000 for those over 50). All future withdrawals are then completely tax-free. A caveat: You have to fall under certain income limits, and can’t make more than $120,000 a year (not a problem for most freelancers).

A SEP, meanwhile, takes pretax contributions like a traditional IRA, up to a maximum of $49,000 a year. It’ll reduce your tax burden now, but in retirement, withdrawals will be taxed at ordinary income-tax rates.

For those freelancers who know their way around a mutual fund and are ready for a graduate course, you might want to add a solo 401(k) to your retirement arsenal.

“Freelancers and consultants might not get paid a lot one year, and then make a huge amount of money another year,” says Lee Hull, principal of Hull Capital Management in Tyler, Texas, who specializes in managing retirement plans for the self-employed.

“A solo 401(k) gives you the most flexibility to save very aggressively when you’re able.” It’s a bit of an administrative headache, though, so it might make the most sense for those who have a financial planner to handle the flurry of paperwork.

Handle your retirement right, and you could end up like Teri Cettina. As a freelance writer in Portland, Cettina faces the same financial uncertainty as any other independent worker. But inspired by the example of her parents – and by her previous gig working in a bank – the 46-year-old mom of two has become a “hardcore” retirement saver.

That means she carves between 10-15 percent out of every single check that comes in, and directs it to one of her multiple retirement accounts. She has an individual 401(k) with Vanguard, a SEP-IRA with T. Rowe Price, and an old company 401(k) that she converted into a Roth IRA. “Stripping money out of my checks is the easiest way to pay myself for retirement,” says Cettina.

“Then I never really think of spending that money, because it’s in a separate account. I’ve made it psychologically painful to spend it on anything other than retirement.”

And that’s the trick, to slice-and-dice every check as religiously as a traditional employer would. According to a member survey by the group Freelancer’s Union, 26 percent of freelancers haven’t saved a nickel for retirement. But if you keep waiting for money to magically appear at the end of the month, retirement security is never going to happen.

“With most freelancers, nobody does anything until they get older,” says Hull. “But pick a plan and get in the habit of putting money away, because if not, soon you’ll be past 50 and start to panic. Remember that in today’s world, every freelancer is their own fund manager.”

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