Exit Strategy 2: Fancy Retirement Financial Plans

One of the primary benefits of working for a large corporation (and working for said corporation for decades and decades of your working life) is the cushy retirement plan that comes with it. Sitting at a desk in a cubicle all day long doesn’t seem nearly as bad when you’ve got visions of a golden retirement awaiting you at the end of your long, long, long tunnel.

Well, we’ve traded all that in. We’re freelancers, and we get none of that stuff called “security” on which the older generations thrived. We’ve kicked the cubicle walls down and sacrificed our financial futures to enjoy the perks of the self-employed.

However, this doesn’t mean that there are no retirement options available to us; on the contrary, as a freelancer, you actually get quite a bit more control over your money and where it goes. While not having an employer kick in a 100 percent match rate into your 401k certainly diminishes your eventual output, all is not lost – assuming you’re planning ahead, you’re planning ahead now, and you’re planning ahead with a responsible financial advisor or banker (please, please talk with an advisor rather than taking my word for it).

SEPs

Also known as Simplified Employee Pensions, these retirement plans let you contribute up to 20 percent of your earnings (even more if you run your freelance business as a corporation). They are pretty easy to open and many banks will let you open one without paying any heavy overhead fees. The annual cap is $46,000 – which, if you’re anything like me, sounds more like an annual target income rather than a fifth of one.

Keogh Plans

Keogh Plans are pretty close to the same type of thing you get from a retirement plan in a big corporation. You come up with a figure you want to make at retirement, you make a plan to get there, and you sock away enough money each year to meet that goal. You might find yourself being required to pay the determined amount each year, which can be a drawback if you’re a freelancer and simply aren’t making that much money one year.

The annual cap is the same as the SEP ($46,000), but there are a few more steps required on your part, including the drafting of a plan and annual reports. There might also be annual fees you’re required to pay. From what I gather, this isn’t the best plan for those under the age of 50 (or freelancers in general).

Solo 401k/Individual 401k

A Solo 401k allows you to put in up to $15,500 of your annual income. Although you don’t get the benefit of an employer match to this contribution (like you do in corporate 401ks), you can also throw in an additional 20 percent of your income.

This is the ideal choice for freelancers, since there is no required annual contribution. This means that when you add on to your family and move in the same year, you don’t have to sock away a good chunk of your income to that retirement plan you set up when you were clocking a regular 60 hours per week. You also get the added bonus of withdrawing your funds or taking a loan out on your savings should money be really tight.

Roth IRA

This allows you to put in up to $5,000 annually without any fuss. You don’t get to deduct your contributions, but you don’t have to pay taxes on the interest you make (you will also get to someday withdraw all your funds without having to pay taxes at that time, either). Unlike the other plans, you can do this one in addition to another choice, thereby maximizing the amount you’re putting away in retirement savings.

I’ve Said it Before and I’ll Say it Again

Talk to someone who really knows about this stuff. These are just a few of the retirement options available to freelancers – my point is to simply let you know that you don’t have to resort to a simple savings account or stock investments just because you’re a freelancer. Uncle Sam is looking out for us, too.