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Retirement Strategies for Freelancers

Running your own business can be the most fulfilling experience possible as a professional. However, doing so removes some of the perks that working for a larger company provides. You have to provide your own retirement plans, and adequately save the right amount of money. Here are some suggestions to help you decide what course of action is right for you.

Remember Social Security

Social Security exists for you, just as if you were working for someone else. You can see this every quarter, when you pay the self-employment taxes. Go to the website and determine how much you will be receiving every month. Factor that into all of your planning guides, as it provides a base level that you will have to live off of. Remember, this is the only instrument guaranteed by the government.

Self-Employed 401(k)

This is one of the more interesting things about planning for retirement as a freelancer. For most individuals, the maximum you are able to contribute to one of these accounts, as pre-tax dollars, is $17,500. As a freelancer, you are able to contribute up to a quarter of your earnings, up to the princely sum of $52,000.

This is due to the concern that your business will fail, leaving you without money to save before you retire. By placing a greater sum in savings now, you can guarantee a better retirement than most. As always, you can always put save more, it just will have to be taxed.

Assume You Will Retire in a Decade

Invest every penny beyond what you will need for six months worth of living expenses. Assume you will not be able to work in ten years, and invest your excess capital in dividend paying stocks and bonds. This will enable you to create a steady stream of income, that will help you even if you can continue working for fifty years.

Remember, retirement is only for the last ten years of your life. You may need help sometime in the last forty years. When the time comes, you can start drawing down on the principal. Since the instruments have been held for several years, you will pay a much lower tax rate on them than you will pay on the 401(k).

Rollover IRA

Only the rare person starts his or her own company right out of college. More often, the average freelancer will have some savings in a retirement account handled by a former employer. It is possible to transfer these funds into another retirement instrument. This will give the freelancer the ability to manage his retirement money better, and obtain the maximum amount of growth possible.

The trick to planning for any retirement is to plan early, save as much as possible, and have multiple income streams. By concentrating on a combination of current income replacement, and a 401(k) that you cannot touch until the traditional retirement age, it is possible to create a financial plan that will support you throughout your life.

Another major component is to reduce the debt load you experience. While there is talk of “good debt,” the reality is that any form of debt reduces your ability to form a positive net worth. Pay down the principle of any and all debt you have, and put the money you would have wasted on interest to good use. If needs be, file bankruptcy and flush out most of the unsecured debt.

Whatever you decide to do, it is important to seek out the advice of a financial advisor before making any major changes to your savings.


Image: iStock

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