The Harpoon Blog

​Planning for Retirement as a Freelancer

by Ryan Battles in Business Tips

As an employee, you often have benefit options laid out for you. Insurance, retirement, and paid sick leave or vacations are standard fare offered from a traditional workplace. Of course, as a self-employed worker, it is up to you to make up for these benefits.

When it comes to retirement planning, fortunately the advantage of having an employer is not as important as you may think. Aside from employer matching of savings (which is free money that some offer, but many don’t), with a little know-how you can have every advantage an employee has when it comes to retirement.

To start, it is important to realize that anyone can save money for retirement, even if you are just putting it in a coffee can in the backyard. Of course, the negative here is that the money will not grow, and due to inflation, will be worth less when it actually comes to retirement.

To combat this loss due to inflation, most people invest the money they are saving for retirement. As long as your money grows at around 3% per year, the spending power of that money should remain the same when it comes to retirement. The problem is, the government sees that 3% growth as income, and when you remove your money from that investment, the government wants to tax it. Now your 3% might only be worth 2% after taxes, and that’s not enough to keep up with inflation.

To be a savvy retirement investor, you will want to do three things:

  1. Set aside the right amount on a regular basis for retirement.
  2. Maximize the percentage of return.
  3. Minimize the taxation on your return.

That’s it! That’s all that an employer does for you, and depending upon the options they provide, they may not even be maximizing the percentage of your return as much as you may be able to on your own.

Setting Aside the Right Amount for Retirement

Many financial planners recommend saving 10% to 15% of your income for retirement, starting in your 20s. However, what if you have a low-paying job during much of your 20s? What if you have a high-paying job in your 20s? How does that affect the amount you need to save as a freelancer in your 30s? To answer these questions we need to analyze your individual financial situation.

To analyze your personal situation, you’ll need to plug the following into a retirement calculator:

  1. Current age
  2. Age of retirement (Avg. 67)
  3. Annual household income
  4. Annual retirement savings (Adjust this to find your sweet spot)
  5. Current retirement savings (Whatever you have in the bank now)
  6. Expected income increase (Avg. 2%)
  7. Percentage of income required at retirement (Avg. 90%)
  8. Years of retirement income (plan on 35 years so you can throw an awesome 100 years old party).

Rules of Thumb

If you are just looking for a loose guideline for how much you need for retirement, you can also use the “Multiply by 25 Rule”, which is to multiply your desired annual income by 25. So, if you want $100,000/yr in retirement, you’d need to aim for a savings of 2.5 million dollars. Don’t forget inflation though, you’ll be wanting whatever 2.5 million dollars today is worth come your retirement age.

Another rule of thumb is to have twice your annual income in retirement savings before age 40.

These are just suggestions, of course. There are many ways you can live off of less when you retire, largely because your lifestyle slows down and you might be spending less. It is a good practice to revisit your retirement goals every other year or so to ensure that you are on track.

Maximize Your Rate of Return

There are many options when it comes to where to invest your savings. In general, banks are the most convenient, and also the worst in terms of return. Historically, placing your money in stocks (or pieces of ownership in a company) provides one of the best rates of return over time. There are risks involved, such as an individual company going bankrupt, losing money, or just not performing very well. To minimize this risk, you can use a mutual fund which is simply a collection of many companies’ stocks in one. With mutual funds, your risk is now on the business economy as a whole, and not an individual company.

Even with mutual funds, there are risks. Stock market crashes can come on quickly and wipe out large portions of your retirement, taking years to build back up to their pre-crash values. If you are nearing retirement age, a stock market crash can instantly change the standard of living you’ll experience for the rest of your life.

If you are still young, a stock market crash shouldn’t scare you too much, as you won’t be touching that retirement savings for a while, and it will climb back up in time. As you approach retirement, you should incrementally invest more in less volatile investments like bonds (companies or governments borrowing money and promising to pay it back with interest at a certain maturity date). Bonds are less risky, but also deliver much less return than stocks.

If this sounds like a lot to worry about, you’re in luck, someone else will manage all of this for you if you work with a company that offers a “Target Retirement” style fund. For example, Vanguard allows you to specify your target retirement date and with a single fund, they will allocate the money you give them automatically to adjust as you grow older, providing greater returns and more risk in the beginning, and tapering off to less risky but less profitable investments when you need dependable income in retirement.

Minimize Your Taxation

Life would be simpler if we didn’t have to pay taxes on investment income. Fortunately, in certain circumstances, we don’t have to! If the money is being saved for retirement, there are a handful of ways you can set up the account so the money either isn’t taxed when you take it out, or it reduces your taxes today. Let’s say you want to commit to saving 15% of your income. Where do you start putting that money?

Increase Your Spouse’s 401K

If your spouse has a job that offers a 401K, you can consider maximizing their contribution to cover both of you, or at least a portion of it.

Individual Retirement Account (IRA)

There are two types of IRA’s, Traditional and Roth. The Roth IRA is your best option as it entitles you to tax-free withdrawals in retirement. You may only contribute to a Roth IRA if you make less than a certain amount of money: $135,000 for single filers and $199,000 for married couples filing jointly.

For a traditional IRA, anyone can contribute to one, but only certain people can take a tax deduction of the contributions. If you are covered by a retirement plan, your income will dictate whether or not your contribution is deductible. For self-employed individuals, you will likely be able to deduct the full amount.

The maximum annual direct contribution to any IRA is $5,500 unless you are age 50 or over, in which case it is $6,500.

Simplified Employee Pension (SEP)

These are easy-to-set-up ways to fund a traditional IRA, requiring only a one-page form, and they can be opened and funded right up until your tax-filing deadline. They are widely available at most banks and brokerages. You can contribute 25 percent of your net self-employment income, up to $53,000 annually. These plans can also work for small-business owners with a handful of employees, but they do not allow for Roth IRAs, wherein contributions are initially taxed but eventual withdrawals are tax-free.

Solo 401(k)

Also known as Individual 401(k)s, these allow $18,000 in annual contributions, plus 25 percent of net earnings from self-employment, up to $53,000 annually. Those 50 years or older looking to catch up on their retirement savings can put in an extra $6,000 annually. These plans can be funded on a pretax basis or post-tax as Roth contributions, and they allow for pre-retirement access through loans and hardship distributions. They must be set up by Dec. 31 of the preceding tax year.


Landed a big freelance account or looking to sock away even more tax-deferred cash? A SEP IRA (or Simplified Employee Pension Individual Retirement Account) may be your best bet. That's because a SEP IRA has an annual contribution limit of 25 percent of your total annual compensation or a maximum $54,000 saved yearly. The money and its investment returns are taxed on withdrawal.

Final Thoughts

Remember, unless the employer is matching the money you are putting aside into retirement, there are few advantages given to employees with a 401k over self-employment. It’s up to you to commit to setting aside the right amount, and target retirement accounts make maximizing your return appropriately very simple. The hardest part is likely to be determining which account type to open up, in which case a meeting with an accountant or financial planner might be best in determining your individual strategy. You can also call into companies such as TD Ameritrade, Charles Schwab, Fidelity, and Vanguard that cater to do-it-yourself investors to receive some guidance and get you started in the right direction.

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