Strategies for independent workers to set aside funds without relying on a state retirement plan.
In the world of freelancing, ensuring a secure financial future can be a challenge. However, a financial expert has highlighted that contributing to a statutory pension is not a solution for freelancers [1]. Instead, a well-structured retirement plan is essential. Here's a guide to best practices for retirement planning for freelancers:
- Setting up Retirement Accounts
Opening and regularly contributing to retirement accounts designed for self-employed individuals, such as SEP IRAs or solo 401(k)s, is crucial [3]. These accounts offer high contribution limits, tax-deferred growth, and simpler administration, making them ideal for freelancers with fluctuating income.
- Building an Emergency Fund
Freelance income can be irregular, so it's important to build an emergency fund and maintain cash reserves. Having cash savings helps manage lean periods and reduces the need to tap into retirement assets prematurely [4].
- Creating an 'Income Floor + Growth Cushion' Strategy
Adopting a barbell investment strategy can help balance stability with growth potential. This strategy separates assets by time horizon — safer, low-risk investments for near-term spending and growth-oriented assets for longer-term accumulation [1].
- Delaying Social Security Benefits
If possible, delaying claiming Social Security benefits can increase monthly benefits and provide a source of income in retirement. Even modest freelance income can reduce withdrawal pressures on retirement savings and provide social engagement [1].
- Utilising Tax-Efficient Withdrawal Strategies
Using tax-efficient withdrawal strategies, such as Roth conversions early in retirement, can lower tax burdens later. Diversifying income sources among taxable, tax-deferred, and tax-free accounts can also minimise the overall tax bill [1][2].
- Taking Advantage of Tax Credits and State Benefits
Freelancers can benefit from tax credits and state benefits available to retirees, such as savers credits, property tax relief, or utility subsidies, which can provide additional financial support [1].
- Planning for Healthcare and Insurance Needs
Given freelancers’ unique situations, it's essential to plan for healthcare and potential insurance needs, which can be major expenses in retirement [not covered directly in these search results].
By combining flexible retirement accounts, a diversified investment mix aligned with timelines and risk tolerance, tax planning, and income diversity including continued freelance work, freelancers can create a resilient plan for their retirement years.
References:
[1] Tappe, D. (Founder and Managing Director, Tappe Consulting) [2] Ergo Insurance Company Study [3] Medium-term capital should include a reserve for upcoming business and private investments in the next few months and years. [4] To get a feeling for the necessary total capital, the sum of the monthly gross requirement multiplied by 240 can be used.
- A well-structured retirement plan for freelancers should include setting up retirement accounts like SEP IRAs or solo 401(k)s, which offer high contribution limits, tax-deferred growth, and simpler administration.
- To manage lean periods and reduce the need to tap into retirement assets prematurely, it's important for freelancers to build an emergency fund and maintain cash reserves.
