NEW YORK (MainStreet) — It's estimated that a third of American workers are now freelancers. While freelancing provides a great degree of flexibility in how you work, it also provides none of the traditional benefits Americans have become accustomed to, including retirement. That's all up to you. So how do you go about saving for retirement when you don't have a "real job?"
You Have Many of the Same Options As Traditional Employees...
"What a lot of people probably don't know is that even when you're self-employed, you can set up the same accounts companies set up," says Craig Brimhall, vice president of retirement Wealth Strategies with Ameriprise. Your options include SEPs, 401(k) plans, profit-sharing plans and IRAs. "Basically anything a corporation can set up, you can set up."
In fact, Brimhall says that one of the problems you might encounter is the sheer number of options. "The menu has been so enlarged, and that's what it makes it tough," he says. He divides retirement plans for freelancers into two broad categories: profit-sharing plans that offer lots of flexibility in terms of contributions and plans that allow for virtually no flexibility, which are usually defined benefit plans.
How Much Do You Need to Say...
Brimhall says that if you save 10% of your income starting with your first job, you're probably going to have adequate money for retirement. In fact, if you save 10% early on, you're probably going to have more money than someone who saves a higher percentage of their income, but at a much later point in their life. "You have more time to save," he says, adding that "the numbers get really difficult when you wait too long."
In fact, Brimhall says there are two benefits to saving early and often. The first is the compound interest, which is going to leave you with a pile of money, even when you don't save that much of your income. The other is the financial discipline that comes along with saving a chunk of your income. "There's always reasons not to save, whatever age you're at," he says. But when you start early, you're used to living on less, which is going to make it easier to live on less as you get older and closer to retirement.
What Are Retirement Accounts For?...
A recent study found that nearly two-thirds of Millennials believe they can use their retirement accounts for financial emergencies. In fact, nothing can be further from the truth. "If you have short-term needs, a retirement account isn't the right place for your money," says Brimhall. "You get a deduction, but you need to pay penalties and taxes on that money when you take it out," he says. Adding to confusion is a lack of consistency when it comes to the rules of what you can take out and when. "Congress and tax simplification just don't go together," Brimhall says. "Some have exceptions for health care and housing, others for disability and education."
Of course, there's a solution to the Byzantine tax code as applies to retirement. "People need to use every tool that's available," says Leslie Bocskor, a managing partner with Electrum Partners. He says that includes life insurance, annuities and IRAs. "Diversifying among the numerous asset classes is best," Bocskor says. "The era of the pension is going away. Politically and economically that doesn't work as well as it used to." This is because pension fund managers have trouble structuring pensions in such a way that they can anticipate financial issues. "The GM pension fund manager just can't anticipate the bankruptcy of GM," Bocskor says. "Pensions are heading the way of the player piano."
Fitting Retirement Savings Into Your Life
Bocskor says that you need to start thinking about budgeting for your life in a way you're not used to. "You need to think about what you need to live on in a month," Bocskor says. This will help you to project what you need for savings in the future. From there, you can start figuring out how you're going to pay for that kind of lifestyle. That can help you plan what your contributions are going to be on a weekly and monthly basis.
You can also start figuring out how you're going to allocate money to different areas. "Life insurance vehicles will pay out when you get older, as well as variable and fixed annuities," says Bocskor. Then you have to figure out how much you have to put into each instrument to get out the money that you need. "Look at it conservatively," Bocskor says. "You have to plan for the margin of error."