The Freelancer’s Guide to Retirement Preparation

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Freelancing has become a new job market in today’s world. People know that relying on the traditional jobs to fulfill their needs is not enough in today’s world. Freelancing industry in past few years has seen a vast increase in home business owners and freelancers. The experts say that the number will continue to grow in the future.

Freelancers have the advantage of working from home. They decide the working time and choose their preferred jobs. Freelance designers feel more relax in working from home than at an office. But, the reality is that there are more challenges in working from home than there are in a firm.

One of the biggest issues that freelance designers can face is the retirement preparation. Yes, being a freelancer can be a very exciting experience for every web designer but, not every web designer thinks about the retirement. There can be many reasons for it such as:

  • Even with the growing number of freelancers, still, many people think freelancing is a part time job rather than proper business
  • Designers don’t plan retirement because they want to enjoy work and freedom for as long as they can

Therefore, in today’s post, we will discuss some ways of preparing yourself for the best retirement plan. By following these simple steps, you can make sure that you’ll have money coming in even after you reach 60, 70, or 80 years old.

Reach Small Goals by Age

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In my opinion, the best way is to focus on reaching small goals rather than going for impossible end goals for the retirement. Fidelity, a multinational financial service company proposes this great plan to save for retirement:

At reaching 35, you should have saved an amount equal to your annual salary and at age 45, you should have saved three times of your annual salary. At age 55, you should have saved five times of your annual salary. This is how, when you retire at 67, you will have eight times your annual salary saved.

When you follow this plan, it is more likely that you will be able to save a lot until your retirement age. But, most of us cannot just save our money for retirement. That is why there are number of investment tools that freelancers can use in order to earn and put aside some funds for their retirement savings.

Now let’s discuss some of those investment tools that you can choose in order to be secure about the income even after you reach retirement.

Choosing a Retirement Account

elderly-man-on-documents

Playing with numbers and digits in order to save for your retirement can be very discouraging for some people. If your plan is to be a freelancer for a long time, you might want to figure out how the ways to save for the retirement. Luckily, there are plenty of options that we are going to discuss which you can surely consider for your retirement plans.

IRA (Individual Retirement Account)

IRA stands for Individual Retirement Account. This is a very familiar term nowadays for everyone who is looking for a solid plan that will work out on their retirement. IRA is actually a savings account that give you large tax breaks. Many freelancers consider it an ideal way to save cash for retirement.

However many people think an IRA itself is an investment but, it’s not. IRA is basically saving plans in which you keep CDs, stocks, bonds, mutual funds and other assets. There are several types of IRA’s but the most popular of them are:

The Traditional IRA

ira

IRA stands for Individual Retirement Account. This is a very familiar term nowadays for everyone who is looking for a solid plan that will work out on their retirement. IRA is actually a tool that was specifically built for tax purposes.

By choosing a traditional IRA account, you can save few thousand dollars every year. The usual amount is around US$5,000 but it depends on the income that you are generating. When you put your money in IRA, it gets deducted from your taxable income. Once you retire from your freelancing career and eliminate the money from IRA, it will be taxed as income.

Roth IRA

Roth IRA is designed and recommended to everyone who doesn’t have an access to the employer matching contribution 401K account. However, it is very much similar to the traditional IRA account in terms of long-term retirement accounts and limited contribution. But, there are very important differences among the both.

In Roth IRA,

  • Your contribution is not tax deducted up-front
  • There is no extra tax deducted when you choose to retire and withdraw your money from the account
  • Your available money in the account grows tax-free for as long as your account remains alive

Drawbacks of IRA

drawbacks

No doubt, IRA is a great opportunity for your investment as savings for your retirement but there are also some drawbacks.

  • The first disadvantage is that, you have to pay the penalty if you withdraw your money before maturity
  • When putting money into IRA, be prepared because it will stay there for a long time
  • The other thing is that, not every IRA account is same; some of them are very good options to choose while others are the worst possible choices.

So, make sure to read first before applying for any account to know how exactly you will be taxed. Also, you need to know the kinds of penalties are put upon certain actions

Investments in IRA

IRAs can be different from one another. It depends on how your money is going to be invested over a time period. There are plenty of strong options in the IRA, where you can invest. These options include:

  • CDs
  • Stocks
  • Bonds
  • Mutual funds

I know all these terms might sound little unclear to you, but let’s have a better understanding of all these terms.

CDs

The Certificate of Deposit, also known as CD, is a classic tool that is used in combination with IRAs.

What is it?

  • These are low-risk investments which pay you a higher amount than other traditional savings account once you retire
  • They obligate you from not touching the money for a specified time period, usually in years.

Although, they give you much more than other saving accounts, still, CDs are not considered as a proper long-term strategy. With CDs, you can earn less than many other investment options due to the low risk involvement.

strategy

There is a clear strategy that you should carefully analyze before going for any investment. The rules are:

  • Investing with low risk will earn you potentially low returns
  • Investing with high risk will earn you potentially high returns

Because CDs have low risk involvement, you can’t expect to earn high returns with it. But, still it is a very powerful tool for many people. In the end, you have to make decisions according to your end goals.

Stocks

Stocks are pieces of ownership that you get from any company.

  • They can vary according to the current financial and future performance of the company
  • When company earns income, you will get the profit on your piece of ownership

Although stocks are considered a risky business when investing, doing so in big companies that are considered safe can earn you a lot.

Bonds

Bonds are a form of loan that you lend to any company or a government. When you buy a bond from a company or the government, you are giving them a loan for a time period. Once the time period ends, you will receive your money plus interest according to the rate or coupon which was decided between both parties.

Bonds are considered to be much safer investment than any other options. But, as the amount is fixed and risk involvement is low, you will only receive a limited amount of returns.

However, there is another option called ‘junk bond’ with which you can earn more amounts, but they are not considered stable and cannot be trusted always. Junk bonds are issued by companies that have low credit rating. Due to high risk involvement, the investors get higher earnings.

Mutual Funds

mutual-funds

Mutual funds are a very good option to look at when preparing for your retirement. In mutual funds, money is collected from a large group of people after which investment professionals carefully invest it on the best projects. These professionals make sure that your money is maximized to its highest level. Your money is spent on different projects rather than just one, something that provides great benefit.

You don’t have to worry about anything because these professionals take care of everything. Mutual funds can earn you higher returns than any other investment option.

But, there are some drawbacks that can come with mutual funds such as:

  • For many people who don’t know business terminologies, understanding all the investment terms can be difficult.
  • You have to keep a proper track about the charges so that you don’t get cheated.
  • You have to give your money to someone whom you don’t know; it can be very intimidating for many people to trust in someone whom they don’t know about.

However, you can also avoid these drawbacks by reading the terms and conditions very carefully before applying to a particular mutual fund. If you don’t understand the terms, you can go to a financial advisor to help you out.

Conclusion

I hope these points will give you some idea about retirement accounts and their uses. Now it depends on how soon you start saving. Remember, whichever retirement plan you choose, be clear about your end goal so that you remain positive with your approach.

In the end, I would like you to tell about your existing approach in saving for retirement. Also, if you would like to add some points or if you want to share your thoughts, feel free to do it by commenting below.

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The Freelancer’s Guide to Retirement Preparation | manda | 4.5
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