Are You A Freelancer? Here’s How to Save for Retirement

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Being self-employed is hard, especially as a freelancer. Between managing clients, preparing deliverables, and wrangling accounting tasks, it can be easy to let saving for retirement slip through the cracks. However, among the hundreds of other little tasks needed to run a business successfully, planning your retirement is an important one. Here’s how to do it.

Building saving into your business plan

As a freelancer, it can be hard to predict short-term cash flows. Incoming contracts, outstanding invoices, and unexpected expenses all add up to sporadic inflows and outflows. While ordinary employees can count on a steady paycheck, freelancers don’t have that luxury — and their savings often pay for it.

One way to build a savings habit as a freelancer is to “backdate” contributions to your retirement account. Each month, treat your retirement savings goal, say $500 at the beginning of April, as an expense, but keep those funds in your bank account until the following month. In May, once you know that April was a cash-flow positive month, transfer those April savings to your retirement account and start again.

For freelancers with fewer, but higher-paying projects throughout the year, consider making proportional contributions based on your cash inflows. Set a savings target, then calculate your goal as a percentage of your gross income, say 5% to save $5,000 on $100,000 of gross income. When cash flow does come in, no matter how large or how small, make a retirement contribution of that percentage to slowly get to your goal throughout the year.

Saving options for the self-employed

Freelancers, on the other hand, bear the brunt of setting up a retirement plan before they can start saving in it. That means evaluating different accounts, registering with a broker, and often creating a written plan document. All that before they can put a dime into their account.

One savings vehicle for freelancers is built on the chassis of the familiar individual retirement account, or IRA. SEP IRAs allow the freelancer’s business to contribute up to $69,000, or 25% of the worker’s income, to the account in 2024. These plans are relatively easy to create and maintain, with an IRA underlying the plan for each worker, even if they are a solo freelancer.

Another familiar option for savers is a single-member or Solo 401(k) plan. The only difference between this plan and a traditional 401(k) is that the owner is the only participant, relieving much of the plan’s administration. With this retirement plan, a freelancer or other small business owner contributes as both the employee and the employer, subject to contribution limits and self-employment earned income as calculated by the IRS.

When to start

The best time to start saving was 20 years ago, but the second-best time is now. The principle of saving early and often applies to the self employed just as much as it applies to traditional workers. With the right plan in place, you can get started right away.

According to a 2022 study, nearly one-third of freelancers are over the age of 50. Although many find their work to be very satisfying, that doesn’t mean they want to do it forever. And while some small business owners can rely on the sale of their business to propel their retirement, freelancers do not always have the same opportunities to do so.

For traditional employees, securing a strong retirement can be as simple as a few clicks of a button. Freelancers and other self-employed workers have more administrative work to do, but can use SEP IRAs and Solo 401(k)s to their advantage. Even with a non-traditional income stream, the principles of saving for retirement are just as important when building a strong financial future.

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