For independents, the idea of planning for retirement may seem nearly impossible. We know what you’re thinking: unpredictable client lists and erratic pay schedules make financial planning tough.
But financial planners Kelley Long, Greg Ward and Doug Spencer from Financial Finesse say it’s entirely possible for you to plan for your golden years.
“The biggest challenge, especially when first starting out, is unpredictable income. Most budgets are built based on a set amount of income, so when your income comes in fits and spurts, it becomes increasingly crucial to plan spending and remain disciplined with saving,” Long says.
Self-employed people miss out on two payroll benefits that W-2 employees probably take for granted: income tax withholding and retirement savings. “When you don't ever see the money in your account, you miss it less,” she says. However, if you’re self-employed, it’s up to you to take that extra step to set the money aside, and Long says you have to pay estimated taxes at a higher rate. But there are ways to save for the future.
Automate, Automate, Automate
Automating your bills and retirement contributions makes it a lot easier to be consistent — and consistency is the key to being successful. Set rules for your money. “Take advantage of the ability to open multiple savings accounts through certain online banks, and label accounts for different purposes,” Long says.
“Maintain a bill-paying checking account where all your fixed monthly bills are paid, like housing, cell phone, utilities, Netflix — basically anything with a due date and a consistent amount,” says Long. She says this account should contain enough money to pay at least 2 months’ worth of bills (ideally, you should have more like a 3-month buffer). Maintaining this account means you won’t be anxious about having enough money to pay a bill and you can easily see how much money is left over.
“It can be tempting when you get a big check to take care of that month's bills and then spend the rest on wants,” she says. “But until you can consistently keep three or more months’ worth of expenses in that account, you have to resist the wants.”
She also recommends setting up an account just for taxes. Automatically deposit a minimum of 20 percent of paid invoices into that account. And, create another account for retirement. Ward recommends investing a set amount of income out of each check you receive from a client. “For example, if you receive $500 for an article and want to save 10 percent, you’d transfer $50 into your Roth IRA,” he says.
If you set up your accounts intentionally and follow your financial rules, you won’t consider important buckets like taxes or retirement an afterthought.
Know Your Investment Options
Independents have investment options. “Independent workers can benefit from a traditional-style retirement plan with flexible contribution rates, such as a one-participant or “solo” 401(k) or one-participant Roth 401(k), or SEP IRA,” according to Ward. Both, he says, are easy to set up and inexpensive to administer.
A solo 401(k) is similar to a traditional 401(k), with one key difference: a self-employed person can make more contributions, since they are both the employer and employee, Doug Spencer says. As an employee, you can contribute up to $18,500 in 2018 ($24,500 if you’re 50 or older), just like if you were an employee at a larger company. Then, if you are a sole proprietorship or partnership, you can make pre-tax, profit sharing contributions of an additional 20% of your earned income. The maximum employee/employer contributions together cannot exceed $55,000 per year in 2018 ($61,000 if catch-up contributions are included). “A solo 401(k) can be a great tool to maximize retirement and tax savings for self-employed individuals,” Spencer says.
If you want to save beyond your IRA limits, Ward suggests that you consider investing in capital assets such as stock and real estate. Be advised that if you generate any income, you may incur an annual tax, but Ward says you can postpone your tax liability until the year you decide to sell your stocks or real estate holdings. “You can further control your tax liability by offsetting capital gains with losses, or by taking advantage of certain tax provisions such as 1031 exchanges on investment property.”
Ask for Help
If some of this terminology sounds unfamiliar or overwhelming, you don’t have to go it alone. “If you're married and your spouse has a job with benefits, ask if they have a financial-wellness benefit — those programs are typically available to spouses, as well, and you can get the unbiased help you need there to get an account open and funded without sales pressure,” Long says.
Financial Planning Days is an organization that sponsors a free financial-planning day in various U.S. cities. On these days, certified financial planners provide one-on-one advice on retirement, small businesses, taxes, investing, insurance, and other topics. The organization also provides workshops. Other sources for free financial workshops include local colleges.
Some religious organizations and civic groups also provide free seminars. “Don't let feeling like you should know something that you don't stand in the way of creating a secure financial future for yourself,” Long says.