Saving For Retirement as a Freelancer

Youth would be an ideal state if it came a little later in life.  ~Herbert Asquith

So you’re a professional artist, which, if my experience with artists holds true, means you are one of those people that will work yourself until your spirit is broken and your fingers are worn down to the knuckle.  (Or is that just my husband?)  Well that’s great!  Good for you, hard work is it’s own reward, and all that.  But…

Are you still going to be doing art the way you do now when you’re 62?  Maybe.   75? Not likely.  90? Forget it.

Let’s face facts: at some point in your life, you are going to want to retire.  When this happens, you’re going to need money, which means that you’re going to have to put aside some money to live on between now and then.  Unfortunately, freelancers don’t get pension plans, so saving for your retirement is up to you.  I know it’s not the first thing on your mind when you’re struggling to pay rent, but saving for your retirement is paying yourself, and you should always pay yourself first!

Individual Retirement Accounts

One of the best ways to save for retirement is to open an Individual Retirement Account, or IRA. There are eleven types of IRA’s, and if you’re curious, you can read up on them here.   (Reading up on IRA’s is a great way to procrastinate, and the knowledge makes for an easy way to impress people at parties.)  Employers also offer different types of retirement accounts, like 401k‘s, but setting up a 401k for yourself generally requires a good deal more administrative work.  You can learn about more of the differences, here, if you’re interested.

Right now we’re going to look at a Simplified Employee Pension plan, or SEP IRA, which is an IRA that is set up for employers to make contributions to employees’ retirement, or for self-employed people, to their own retirement. The IRS limits your contribution to the SEP IRA- use this contribution calculator to figure out your maximum contribution.

The great part is you can take this money out before you figure your taxes!  So, you don’t have to pay taxes on whatever money you put into that account, and you can contribute to it right up until you file your taxes.  The catch?  You have to pay taxes on it when you take it out for retirement- this is called a tax-deferred contribution.  Also, you cannot take money out of your IRA usually until you are 59 1/2 years of age without penalty.

There are other types of IRA’s, and the Roth IRA lets you make contributions that are not tax-deferred.  This means that your money is subject to taxes when you put it in, but it can grow in the account tax-free, and you will owe nothing when you take it out.  Roth IRA’s are very popular with people who are expecting their money to grow significantly in their investment accounts, the idea being, “why pay thousands later if you can pay hundreds now?”.  There are restrictions on who can open a Roth IRA, and the contribution limits for people under 50 are $5,000 in 2009.

There are advantages and drawbacks to each type of retirement account.  But, you aren’t going to get enough money by storing it under the mattress; you have to take it to a professional.   There are countless investment firms, banks, and brokers who would love to help you plan for your future.  Do not settle, shop around!  Choose a company you trust, that isn’t going to charge you an arm and a leg for transaction fees.  I can’t give advice on this part, this kind of decision has to be made by you and you alone.  A simple google search for “how to open an IRA” will reveal the many options available to you.

We’re going to move on to how much you should be saving, but you can find more self-employed retirement account options here.

How Much to Save

Figuring out how much you should save for your retirement is what people in finance call “super freakin insanely hard”.  Okay, maybe they don’t call it that, but they should.  The tricky part is, it varies completely from person to person, based on factors like your current income, your current expenses, the number of years until your retirement, the number of years you plan on… ehm.. living, the rate of inflation, your expected expenses, and on and on.  What you really want to do is try and figure out your number- that is, how much you will need for your retirement.  Check out the internet for retirement calculators, and be forewarned- these numbers may be very, very scary!

A Bit of Extra Info- Inflation and the Importance of Investing

As a side note, there’s a fascinating phenomenon that we here in the United States get to experience each year, like Christmas, but without presents or holiday cheer or anything good at all.  It’s called inflation- and it means that money has less purchasing power each year.  Based on some inflation calculators (google it for time-wasting fun), $10 in 1983 is roughly equivalent to $22 today!  Rates of inflation vary, and there’s no way to know for sure what inflation rates will be like years from now.  The “inflation rate” is the percentage change in the Consumer Price Index year-to-year.

This is important to you because you can’t just stuff your money under a mattress- you need to invest it or you are literally losing it!

Let’s look at this chart.  The blue line shows $10,000 you saved under a mattress in 1983, and the orange line shows what you’d have if you had that same $10,000 in an IRA account that had an 8% return.  (Historically, stock yields do even better, around 12%, but we’re picking 8% to be more modest.)

You can see the difference clearly!  That $10,000 is worth a lot more now!  That is the power of investing.

We’ll get more into investment later, but for now you should know that your retirement is definitely worth saving for.  The more you can save, the better off you’ll be in the long term.