Freelancer's Guide to Retirement Planning: Secure Your Future

When it comes to retirement planning, many freelancers either think: I don't make enough to save right now, or I don't have time to plan; I’ll get to it later. Both of these are big mistakes.

The sooner you start planning for retirement, the better your chances of building up enough savings to retire when you're ready.

As a freelancer, you have several ways to start building your retirement nest egg—even if your income isn’t predictable from month to month. Many of these options can be set up online in just a few minutes.

Here’s what you should know—minus the complicated finance speak—to find the best freelance retirement plan for you and get started right away.

Retirement challenges for freelancers

Rising housing costs, expanding a family, and unexpected expenses can make saving for retirement difficult for any worker. Freelancers also face these challenges:

• No employer benefits. Without a company offering 401(k) matching or pensions, it’s even more important for you to create a retirement plan that regularly sets aside funds.
• Unpredictable income. Some months are leaner than others, so you must be disciplined about saving consistently and put more aside during lucrative months to make up for leaner months.
• Uncertain work longevity. As you get older, you may not be able to sustain the same work pace or new technology may reduce the demand for your services. A solid retirement plan helps cushion against these uncertainties.

Assess your current financial health

Does the idea of looking at your financial health make you cringe? For many people, this step brings anxiety, embarrassment, or fear, so they do nothing. They have real reasons for their reactions, but giving in to them can put their future at risk.

By being brave enough to examine your financial state now, you can realistically determine how you’ll pay your current bills, build an emergency fund to cover lean times and unexpected expenses, and still save for retirement. 

Get a picture of your financial health by looking at the following:

• Income sources. List all of the areas that bring in money. These may be one-off projects, retainer contracts with clients, and occasional income sources. For example, do you rent out a room through Airbnb? Receive royalties from a past creation? Sell a product on Etsy?
• Expenses. Total your monthly and yearly expenses. Since freelance income can fluctuate, it’s important to know your fixed costs (e.g., rent, utilities) and variable costs (e.g., entertainment, travel).
• Debt assessment. Look at all of your outstanding debt such as credit cards, student loans, car payments, and mortgages. Review what’s being paid down, the interest rates, and how this affects your ability to save.
• Savings. How much do you have saved to cover slow months or unexpected expenses? Financial experts recommend having enough to cover six months of living expenses in an easily accessible account.

Set retirement goals

Visualize what your retirement will look like to help you estimate future expenses and create a more accurate savings target. Start by considering:

• At what age do you want to retire? This is your ideal goal, even if you think you may occasionally take on a project for fun during your retirement.
• What’s your health outlook? As a freelancer, you won’t have employer-subsidized health insurance in retirement. Account for family health history, existing medical conditions, and expenses like premiums, deductibles, and long-term care.
• What does your lifestyle look like? Is it the same as your lifestyle now, but with your house paid off? Are you thinking of downsizing or moving to a lower-cost area? How much are you traveling? A general rule of thumb is to aim for enough savings to replace 70 to 80% of your current income in retirement. This gives a rough idea of how much you’ll need each year to maintain your lifestyle.
• How much are your Social Security benefits? Freelancers pay self-employment tax, which includes both the employer and employee portions of Social Security (12.4%). This money goes directly into your Social Security account, which will likely be a key part of your retirement income. Be sure to track your benefits over time in case you need to adjust your savings to meet retirement goals.

Choose the right freelance retirement plan

The best freelance retirement plan depends on your income, financial goals, and how much flexibility you want. By selecting the right plan, or combination of plans, you can take advantage of tax benefits while building significant retirement savings.

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Individual Retirement Accounts (IRAs)

Some providers allow you to open an IRA account with $0 and with no minimum deposits for the year. Others may require an initial investment of $500 or $1,000.

Traditional IRA

• Worth considering if… You’re a freelancer with no employees, want an immediate tax break, or don’t have a steady income.
• Contributions. You can add funds to your traditional IRA for each year that you earn money working. However, contributions aren’t required every year, even if you can make them.
• Tax benefits. Contributions may be tax deductible, which reduces your taxable income for the year. You don’t pay taxes on contributions until you withdraw the funds when you retire.
• Limitations. You can continue making contributions no matter how much you earn, but your tax deductions phase out at higher income levels.

Roth IRA

• Worth considering if… You’re a freelancer who expects to be in a higher tax bracket in retirement, don’t have employees, or want tax-free withdrawals.
• Contributions. Contributions to a Roth IRA are made with after-tax dollars, so when you start retirement withdrawals you’ll get all of the money you’ve saved.
• Tax benefits. Earnings grow tax-free and qualified withdrawals are tax-free, but you can’t deduct Roth IRA contributions on your tax return.
• Limitations. At higher income levels, you’re limited by the amount you can contribute each year.
  

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IRAs for you and your employees

These plans are designed for freelancers who want to provide themselves or their small band of employees a significant retirement savings with less start-up and operating costs than typical employee retirement plans.

Simplified Employee Pension (SEP) IRA

• Worth considering if… You’re a freelancer with no or few employees, want the flexibility to save more in prosperous years and less in leaner times, or avoid annual contribution commitments.
• Contributions. The amount you can contribute is higher than a 401(k) or traditional or Roth IRA, which allows you to build up your savings faster. You don’t have to make a contribution every year.
• Tax benefits. You can choose to make contributions with pre-tax dollars (traditional SEP IRA) for an immediate tax deduction or make contributions with after-tax dollars (Roth SEP IRA) for tax-free growth and withdrawals later. Contributions made to employee accounts are tax deductible for the employer, helping reduce your taxable income while saving for retirement.
• Limitations. Only the employer can make contributions to the account. Contributions for employees must be equal—as a percentage of pay—to the ones you make for yourself.

Savings Incentive Match Plan for Employees (SIMPLE) IRA

• Worth considering if… You’re a business owner with zero to 100 employees, a steady income to make annual employer contributions, or want to allow employees to contribute too.
• Contributions. Employees can contribute up to $16,000, plus a catch-up contribution of $3,500 if they’re 50 or older. Employers can match contributions dollar for dollar up to 3% of earnings or provide fixed contributions of 2% to every eligible employee.
• Tax benefits. Employees can enjoy tax-deferred growth until retirement on any deposits in a traditional SIMPLE IRA or they can choose a Roth SIMPLE IRA and enjoy tax-free growth. Contributions you make to employee accounts are tax deductible.
• Limitations. As the employer, you must make contributions to the employee’s account every year. If you choose the fixed 2% option, employees don’t have to make a contribution to earn your contribution.

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Solo 401(k) plans

A solo 401(k) is sometimes called a self-employed 401(k).

• Worth considering if… You’re a freelancer with no employees, a high-earner who wants to make larger contributions, or you want a plan that covers you and your spouse.
• Tax benefits. Solo traditional 401(k) contributions are made pre-tax, which lowers your taxable income for the year; qualified distributions are taxed at ordinary income rates. Solo Roth 401(k) contributions are made with after-tax dollars; qualified distributions are tax-free.
• Contributions. You can contribute as both an employer and an employee. The maximum combined employer and employee contributions for 2024 are $69,000, plus employee catch-up contributions up to $7,500.
• Limitations. If you’re a freelancer and also employed by another company, you can participate in their 401(k) and a solo 401(k), but note that contribution limits are by person, not by plan.

Now that you know the best freelance retirement plan(s) to choose, it’s time to start funding it. The sections below dive into how to protect your savings so that it continues to grow over the years.

Save for emergencies

Before aggressively investing for retirement, build an emergency fund with at least three—but ideally six—months of living expenses. This helps protect your retirement savings in case of low-earning months or unexpected bills. Here are a few ways to shore up your emergency savings:

• Set a clear goal. Having a target keeps you motivated and gives you a sense of how much more you need to save.
• Start small and be consistent. Even if it’s just $25 or $50 from each payment, these small deposits add up over time. When you have fatter months, save a larger amount to make up for leaner months.
• Automate your savings. As important as setting aside a certain amount each month is doing it consistently. Consider automatically transferring a set amount from your checking account to your savings account whenever you get paid. You can always add an additional deposit when you’re extra flush.
• Cut back on non-essential spending. During slower months, save money by focusing on essentials. Perhaps eat out less or host a game night with friends instead of going out.
• Reduce your outstanding debt. Systematically pay off high-interest debt to avoid paying non-value-added interest expenses over time.
• Review your budget regularly. As freelancers, we must stay on top of our finances. Review your income and expenses monthly to avoid overspending and keep your emergency fund on track.
• Use savings tools and apps. Consider using apps like Chime, which offers several money-saving features, and Acorns, which automatically rounds your purchases up to the nearest dollar and invests the difference.

Tips for growing your retirement investments

As a freelancer, you can have good and lean months throughout the year, but you can still grow a solid retirement nest egg over time. These tips can help you stay on track no matter how your income fluctuates.

Diversify your investments

It’s smart to spread your money across different types of investments—like stocks, bonds, mutual funds, and ETFs (exchange-traded funds). A good mix of high-, medium-, and low-risk investments can help grow your portfolio and get you closer to your savings goal. As you get closer to retirement, financial planners often recommend shifting from higher-risk investments to more conservative ones. This helps protect your savings from any big swings in the market, keeping your hard-earned money safer as you near retirement.

Invest consistently, even in low-income months

Instead of putting a big chunk of money into the market all at once, try investing a set amount regularly, like every month or quarter. This approach is called dollar-cost averaging (DCA), and it helps you invest with less risk. The idea with DCA is sometimes you'll buy when the market is up and other times when it's down—and that’s totally fine. By investing consistently, you smooth out the market’s highs and lows, which reduces the risk of making a big investment at the wrong time. Over the long term, this strategy can lead to steady growth.

Start as early as possible

The earlier you start putting money aside, the more time your money has to grow with compound interest. Take full advantage of compounding by reinvesting dividends and interest back into your retirement accounts.

Regularly review and adjust your plan

Life and income can change quickly as a freelancer, so review your investment strategy and retirement goals every year. And then adjust your risk tolerance, contribution levels, and asset allocation as needed.

Stay informed on changes in tax laws

Maximize your retirement savings by making the most of tax deductions and benefits. When contribution limits change, it could mean paying less in taxes, so be sure to adjust your savings strategy accordingly. Also, keep an eye on self-employment tax updates, as they might require you to tweak your monthly investment amounts. Staying informed can also help you avoid penalties, like when rules for early withdrawals change.

Consider hiring a financial advisor

Managing investments can be time-consuming and overwhelming. Consider working with a financial advisor who understands the challenges freelancers face. A professional can help you create a custom plan that adjusts to your income level and the amount of risk you’re comfortable with. Then they’ll manage your portfolio by rebalancing it as needed (adjust it to maintain the desired mix of assets and risk) so that you’re protected from the ups and downs of the markets.

Leverage technology to manage your plan

If you’re looking for a hands-off way to handle your retirement planning, don’t want to work with a traditional financial advisor, and have fairly simple needs, a robo-advisor might be worth considering.

A robo-advisor is an online platform that uses algorithms to manage your financial planning and investments—potentially without ever needing to speak to a human. Here’s how they work:

• Sign up online by filling out your financial goals, risk tolerance, and timeline
• The robo-advisor uses algorithms to create a customized portfolio, usually made up of low-cost ETFs
• The robo-advisor automatically manages your investments by doing things like rebalancing your portfolio and optimizing your taxes so you potentially pay less and save more
  

Popular robo-advisors include Ellevest, Betterment, and Vanguard. These platforms charge lower fees than traditional financial advisors, which may be a good option for smaller portfolios. 

Freelance with Upwork

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This article is intended for educational purposes and should not be viewed as legal or tax advice. Please consult a professional to find the solution that best fits your situation.

Upwork is not affiliated with and does not sponsor or endorse any of the tools or services discussed in this article. These tools and services are provided only as potential options, and each reader and company should take the time needed to adequately analyze and determine the tools or services that would best fit their specific needs and situation.