Freelancers, We Need to Talk About Retirement On Your Terms

freelancer [free-lans, -lahns, -lans, -lahns-er]: a person who works as a writer, designer, performer, or the like, selling work or services by the hour, day, job, etc., rather than working on a regular salary basis for one employer. 

Hitting the road on your own as a freelancer can be liberating. You get to toss the knee length skirts and heels for yoga pants and pajamas; office gossip and a boss you hate are no longer your problems; you can finally fill your day with projects that genuinely excite you. What could be better than that?

Honestly —  not much.

Hey, you may even be making good money and saving, life is great. But, according to Sallie Krawcheck,  co-founder, and CEO of Ellevest, that only get’s half the job done. You have to be thinking about Retired You too.

Click here to create your free Investment Plan from Ellevest

While freelancing allows for more flexibility in hours, the opportunity to work on a dream project, and more control of your professional destiny, it also means you give up on the security that comes with the 9-to-5.

It’s now fully for you to be in full control of your financial situation, both current and future. Saving is great, but it’s not enough. You have to be saving for future you.

When you left your corporate job, you likely also left your 401(k) plan and any match your old company had on the table. Sallie Krawcheck, whom I mentioned earlier, founded Ellevest with the specific goal of helping women take control of their financial future and closing the gender investing gender gap.

A few years ago, Krawcheck made a terrifying observation: “The retirement savings crisis in this country is a women’s crisis. Eighty percent of the people in retirement homes are women.”

We know, shocking. Right?

What’s even worse, studies have shown that women over the age of 65 are more likely to be living in poverty than men of the same age. One major reason for this is the very depressing (but sadly true) fact is that women are much less likely to invest their savings than men (ahem… that’s what we mean about the gender investment gap — you can read more about it here).


Plus, it’s a fact that a woman that goes the freelance route earns less than a salaried woman, and taking the gender pay gap and the fact that over half of the 53 million freelancers in the U.S. are women into consideration, that’s pretty concerning because it can leave many women seriously unprepared for retirement.

All that said, if you are one of the millions of female freelancers, entrepreneurs, side-hustler—or a corporate employee with no retirement plan — you can (and absolutely should) still save for retirement.

We get it… it can be scary — ok, maybe terrifying — to put aside some of today’s paycheck when you don’t always know how or when you’re going to get your next one. And before you say, “I’m much too young to be saving for retirement,” remember the last time you were at work having one of those, “I can’t wait to travel the world” moments. That 30-second daydream you had about sipping piña coladas on the beach — however, you imagine it — that is your retirement dream.

And much like how your birthday, Halloween and Christmas creep up on you, and you think, “How can a whole year have gone by?”, retirement will come before you know it. For that reason, and so much more, it’s time to make that dream a goal and plan for it. How?

First, build your emergency fund (money set aside that covers three-to-six months of living expenses) and pay off your bad debt (more on how to get rid of debt — and still invest here). As a freelancer, it can be hard setting aside money, especially if you’re not sure where your next paycheck is coming from. This is why building an emergency fund comes in useful; it can make the occasional lag time between getting paid less nerve-racking. By factoring retirement savings into your rate, you’ll make it easier to save because you’ve already allocated some money for your retirement account(s).

Once you’ve built your emergency fund, and you’ve paid off any bad debt (ahem… that credit card debt), it’s time to set your sights on retirement — and future you.
Click here to create your free Investment Plan from Ellevest

Next, bill your client for your retirement.

Yup, you read that right — you need to value yourself. Your time and your work are valuable, so make sure you’re billing for what you are really worth, and that’s more than an hourly rate — especially since research shows that the gender pay gap widens for self-employed women.

To calculate your true hourly rate, Ellevest recommends outlining how much money you need each month for your different obligations. (You can see an example here.) This includes your hourly rates and also includes contributions to your retirement account(s). Now, you’re probably wondering how much money you should set aside for your retirement each month. (We’ll get to that part of your planning-for-the-future process below).  Getting back on track, once you add up add up those numbers and get your monthly total, divide it by the hours you expect to work each month to arrive at a starting point for your hourly rate. Ta-da: this is your baseline and should be your hourly rate.

Now, after you get your baseline hourly rate, do some research to get a sense of how much more you can charge given your line of work and expertise. You’ve got this.

Ok, so you’ve built your emergency fund, and you’ve paid off all your bad debt.

Next, become a woman with a retirement plan. When it comes to getting things done, there’s nothing quite like having a plan. Amiright? Seriously — stop worrying about the future and plan for it.

The net of it is: the work you are doing is valuable; you are valubale; future you is valuable.

Click here to create your free Investment Plan from Ellevest

As a freelancer, you have several options for retirement accounts, including individual retirement accounts (IRAs) and a 401(k) specifically designed for self-employed individuals. And they’re not as complicated as you think; it really comes down to your desired contribution level, tax benefits, and income level.

So, how do you know which is best for you?  With the help of Ellevest, we outline them below. 

1. Traditional IRA

The first option we’re going to review is a traditional IRA. With these, you contribute pre-tax earnings into your account and don’t have to worry about giving Uncle Sam a penny until you withdraw that money later in life. Actually, Uncle Sam is the one giving you money here — at least temporarily.  If you contribute to a traditional IRA you can fully or partially write that contribution off when you file your federal income tax return, depending on your circumstances.

And since you aren’t covered by a retirement plan through work, your annual contributions to a traditional IRA may be completely tax-deductible. This reduces your tax liability for the year, potentially leaving more money for you to invest toward your retirement. A traditional IRA is good for nearly every self-employed individual with an earned income.

But, as Krawcheck says, there’s no such thing as a free lunch. “The potential drawback of a traditional IRA? You could end up paying more in taxes when you do eventually withdraw your money if you’ve moved into a higher income bracket or if the government has raised tax rates by that time.” Any withdrawals you make from a traditional IRA are taxed as ordinary income.

2. Roth IRA

The second option is a Roth IRA. This type of retirement account treats taxes differently than a traditional IRA. With a Roth, you pay taxes on whatever you contribute from the start. So you don’t reduce your tax liability for the year, but you also don’t ever have to pay taxes on that money again. The good part? Whatever is in your account when you retire is all yours.

However, unlike traditional IRAs, Roth IRAs come with income requirements, and they’re not for everyone. If you fall within these income requirements, and can afford to pay taxes off the bat, and/or anticipate that your tax rate will be higher down the line (because you expect to make more money), a Roth IRA could be a great option for you. But since we have no way of knowing what tax rates will look like in the future, having retirement accounts that treat taxes differently (e.g., both a traditional and Roth IRA) isn’t a bad thing.

Krawcheck explains, “You can contribute a combined maximum of $5,500 per year — or $6,500 if you’re 50 years old or older — to all of your traditional and Roth IRAs. Now for your monthly rate calculations: $5,500 divided by 12 is $458.33. That’s how much you should factor into your monthly rate if you decide to go either the traditional or Roth IRA route. If you’re 50 or older, your retirement savings target is $542.”

3. Simplified Employee Pension Individual Retirement Account (SEP-IRA)

The third option is a simplified employee pension individual retirement account or a SEP-IRA. With this type of retirement account, you can contribute 25% of your earnings, up to a maximum of $54,000 annually (that’s a lot higher than the annual contribution limits on a traditional or Roth IRA), which is why it can be a great option for high-earning freelancers — which we hope will be all of you.

As with a traditional IRA, SEP-IRA contributions are also tax-deductible — and you don’t pay taxes on the money you make until you withdraw it meaning your earnings grow tax-deferred. Let’s hope that freelancing is working out well for you and you’re doing extremely well, and you want to max out your SEP IRA this year.

Here’s what the math looks like: divide $54,000 by 12, and you get $4,500. So Ellevest recommends accounting for that at your monthly rate if you want to max out your SEP IRA.

4. Solo 401(k)

Also called the one-participant 401(k) or Individual 401(k), a solo 401(k) is the same as a traditional 401(k)http://ellevest-esign.pxf.io/c/393390/418664/5402

offered by an employer to its employees. This means you can contribute to your plan as both the employer and employee.

Your contributions are pre-tax, so you’ll end up paying taxes when you withdraw your money later. As an employee, you can contribute a maximum of $18,000 annually ($24,000 if you’re 50 or older). As an employer, you can throw in either up to 20% of your earnings if you’re a sole proprietor or 25% of your business’ earnings. Total solo 401(k) contributions are capped at $54,000 ($60,000 if you’re 50 or older).

The math here is the same as with the SEP-IRA.  Ellevest recommends allocating $4,500 of your monthly rate toward retirement savings to max out your solo 401(k).

You’re Getting Paid. Now Get Self Made.

Whether you’re sitting poolside in the Bahamas or traveling the world, you know you want to retire in style. And you deserve a retirement account designed to help you do just that. That’s why Ellevest flips retirement planning on its head and brings you retirement plans — that are specifically built for women.

The company aims to serve women’s needs better than any other existing system by using an algorithm tailored specifically to women’s incomes and life cycles. (Believe it or not, no one else has thought to do this before).

Think it involves too much management, set up automatic deposits for your retirement account(s). At Ellevest, they can set up bi-monthly, monthly, and quarterly deposits to your IRA. And with direct deposits, you can build up your retirement savings without even thinking about it.

Just started freelancing and your income is variable? Doesn’t that mean saving for retirement will be challenging?

Maybe, yes, but every little bit counts. So if you’re unsure about the dollar amount, perhaps shoot for a fixed percentage of each paycheck. It’s less stressful than trying to stretch a smaller paycheck, and you’re still getting into the habit of saving regularly for retirement.The experts recommend putting 20% of your income toward investing future goals (more on that breakdown here), including retirement; but if 10%, or even 5%, is what’s realistic right now, do that and work your way up as your rate rises.

And the sooner you start the better. You can thank compounding — which gives you the opportunity to earn returns on your contributions and even returns on those returns —  for that.  While you’re young, time is on your side.  So, don’t let that fact that you’re a self-employed stand in your way—pick a retirement plan and start saving.

You’ve got this.


Disclosures: We’re excited to be working with the team at Ellevest to start this conversation about women and money. We may receive compensation if you become an Ellevest client. 

Opening image: Babba C. Rivera


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