As a freelancer or content creator, you need to consider what you’ll do when you get older. Maybe you won’t always want to work, or you won’t always be able to. So, how do you start planning for a possible retirement in the future? Retirement plans for self employed people may be intimidating, but they’re important.
Before we get started, please note that the author of this piece is not a financial professional. We’re not providing you with legal, accounting, or other professional advice. You should consult such a professional before making any decisions about your specific money situation. Our goal is to help you know what to ask about and get you started.
Where Should I Put My Money as a Self Employed Person?
If you’re just getting started with investing, it can be hard to know where to put your money. The simplest answer for Americans is an IRA, or individual retirement arrangement. An IRA is available to anyone with taxable income.
With an IRA you contribute money at regular intervals over a period of decades. The bank then uses this money to invest on your behalf.
You receive some tax advantages from putting money into an IRA as well. However, unlike a normal savings account, you are expected not to withdraw money from your IRA until you are at least 59 ½ years old. It is possible to withdraw from it before then, but you will incur financial penalties for doing so.
There are two kinds of IRAs: traditional and Roth. The main difference between the two is in how they are taxed. Contributions to a traditional IRA are generally tax-deductible, while contributions to a Roth IRA are not.
However, a traditional IRA is taxed when you eventually withdraw money from it, while those from a Roth IRA are not. In other words, you’re either paying the taxes on your IRA now or later.
How Do I Start an IRA or Roth IRA?
Starting an IRA or Roth IRA is fairly straightforward. Here are the steps to follow:
Step 1) Find a Place To Set up an IRA
This can be done at a bank, a life insurance company, a mutual fund, or a stockbroker. We can’t recommend any specific firms, but there are plenty of recommendations out there on sites like Nerdwallet. Alternatively, you might want to hire a financial advisor who specializes in working with self-employed people to give you advice. Setting up an IRA typically requires making some choices about how much risk you can tolerate, whether you want to invest in socially-conscious companies, and so on, and an advisor can help you navigate these decisions.
Step 2) Make Regular Contributions
If possible, set up automated contributions to your IRA so that you don’t have to remember to make them. Note that because IRAs come with tax advantages, the IRS sets a limit on annual contributions.
In 2024, the contribution limit for all IRAs (traditional and Roth) that you own is $7,000, or $8,000 if you’re 50 or older by the end of the year. Note that if you have less taxable compensation than this limit in a given year, you cannot contribute more than what you’ve made, for instance with gifts or other sources of income.
The deadline for contributions each year is your tax return filing deadline, which typically means you can make contributions for a calendar year until the following April.
Step 3) Leave It Alone
It’s worth looking into your IRA once in a while, and most banks and other financial institutions will send you regular updates about it. However, it’s not necessary to monitor its performance daily.
Step 4) Wait Until You’re 59 ½ Before You Withdrawal
When you turn 59 ½ years old, you can start making withdrawals (or what the IRS calls “distributions”) from your IRA without incurring penalties. When doing so, you must file form 1099-R with the IRS, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
Are the Stock Market or Crypto Potential Retirement Plans for Self Employed People?
Investing in stocks or crypto can be tempting, especially when you hear stories about people catching sudden windfalls on good bets. But if you’re trying to plan for retirement, then these aren’t ideal strategies. Both the stock market and crypto come with a lot of risk and demand a lot of research to make informed decisions.
Generally speaking, you shouldn’t put any money into stocks or crypto that you aren’t willing to lose. If you’re planning for retirement, you want to maximize your gains over a long period of time with minimal time and effort required so that you can focus on your actual work. For this reason, IRAs are a better fit than the stock market.
What About Cash Savings?
Having an emergency savings fund is always a good idea if you’re self-employed. The general rule of thumb is to have at least six months of living expenses (rent, food, etc.) on hand at any one time, in case you’re not able to work for a while or have a big, unexpected expense like computer repair, pet surgery, and so on.
However, a cash savings account is not a realistic option for your retirement. Why? In a word, inflation. Essentially, inflation means that as prices go up, the value of your savings will diminish. Thus, while it’s good to have some cash on hand in case of emergencies, a savings account isn’t a viable alternative strategy to investing long-term.
Do You Have Any Advice For Retirement Plans If I’m Worried About the Market/Economy/Society Collapsing?
Anything is possible. There are no retirement plans for self employed people that consider the apocalypse directly. All kinds of investments carry risk, and the market will always fluctuate, sometimes wildly. The idea with an instrument like an IRA is that you start it as young as possible so that you can weather these fluctuations. Over time you eventually end up with a great deal more than you started with.
For the most part, you shouldn’t worry about day-to-day drops and gains in your account. Remember, you’re in it for the long haul rather than a quick turnaround.
You can look at it this way: if some catastrophic society-level collapse does occur and you’ve been investing your money, all you’ll have lost out on is the ability to spend it in the present. If you decide not to plan for retirement because you assume the world will become Mad Max and it doesn’t, then you’ll be in a lot more trouble than in the alternative scenario.
Talk to an Expert Before You Invest
Thinking about money can be stressful. Thinking about the future can be stressful, too. Combining the two can thus be an intensely stressful experience. But worrying won’t change your situation — only taking action can do that.
Setting up an IRA or Roth IRA doesn’t take much effort, and contributing as much as you can (up to the limits) is a simple way to set yourself up for a comfortable financial future. And again, be sure to consult with an experienced financial professional before making any decisions regarding your money.
