Scary Product Warnings, and Retirement Plans for Freelancers (5 Video Links)

“Staph, Strep, E Coli, Salmonella”

 

These four serious medical issues were listed on a 4-pack of Clorox Disinfecting Wipes.

 

Well, that’s terrifying- I guess I need to get some wipes to prevent these issues from killing me, or my family.

 

Fear can be an effective marketing strategy.

 

I’m not here to scare anymore, but I do think freelancers need to find access to a retirement plan, if they don’t already have one.

 

This article defines retirement plans, and why I think investing in these plans may be the most important financial decision a freelancer will ever make. Finally, I’ll explain where you can locate a retirement plan, if you can’t find one.

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I Get It

 

Now, I get it.

 

As a freelancer, you work more hours than you might as an employee, and you’re responsible for everything, including administration, sales, and marketing. In addition, you may be plowing the extra earnings you generate back into your business- and you don’t think you have the available funds for a retirement plan. Investing any amount, however, is better than nothing.

Like any other investor, you have to consider market risk, stock price volatility, and investment costs. The decisions you make help you maximize the dollars that you save and invest. Consider how a retirement plan can benefit you.

 

How Retirement Plans Work

 

The most common investment for employees is a 401(k) retirement plan. Now, the structure may be different for a freelancer, but the basic investing concepts are the same.

 

Think about it this way.

 

Most 401(k) plans allow you to invest pretax dollars into a retirement plan that’s provided through work. Let’s say you want to invest $100. If you use your company’s 401(k) plan, the entire $100 is invested. The $100 investment – and all of the earnings – aren’t taxed until you take money out of the plan at retirement.

 

What if you invested on your own- outside of a retirement plan?

 

Instead of investing $100, maybe you invest only $80 after taxes. Over 20 to 30 years, that extra $20 investment can make a huge difference in your total return.

And that’s the key: the extra dollars that you can invest, because the dollars are not taxed until you take money out at retirement.

How to open a 401(k) without an employer

It’s hard to say which is the best retirement plan for self-employed workers with employees, but you have several options, as explained by Investopedia:

Using a Sole 401(k)

“You, as the self-employed, act as both the employer and employee. Solo 401(k)s offer greater control versus employer-sponsored 401(k) plans—and you can contribute into a traditional or Roth solo 401(k). You can also contribute as both the employee and the employer.”

Investing in a SEP Retirement Plan

“(SEP) allows individuals to contribute pre-tax earnings. Only an employee can contribute to an SEP IRA—not the employer. Eligibility includes being at least 21 years old, having worked for the company three of the last five years, and making $600 or more per year. With a SEP IRA, you must contribute the same percentage of income for other employees (if you have them).”

Compounding interest is a big reason to invest in a retirement plan.

The Magic of Compounding

 

The ability to invest a larger amount of dollars can make a massive difference over time, due to the concept of compounding interest, or earning “interest on interest”.

 

When you compound interest, your total earnings can be much higher

 

As an example, assume a $1,000 investment at a 5% interest rate, with total annual interest earned of $50 in year one. Here’s the key point: in year two, the investor keeps the original $1,000 invested, plus the year one earnings of $50.

 

The total amount invested in year two is $1,050, and you earn 5%, or $52.50 in interest. By investing an extra 50 bucks, you earn $52.50- or $2.50 more than in year one.

 

You can envision more money going into the bucket each year, since you leave your earnings in the bucket. If you took each year’s interest out, you’d only invest the original $1,000 each year- and you’d end up with less money over time.

 

Investing using a retirement plan allows you to accumulate far more earnings over time using compounding interest.

 

Retirement Plans for Self Employed

 

What if you’re a freelancer/ self-employed person?

 

You not working for a company, so does that mean no access to a retirement plan?

 

According to the Pension Rights Center, half of the private-sector workforce (58 million workers) were not participating in a work-sponsored retirement plan in 2018. Since then, the number of freelancers has increased.

 

Much like health coverage, a number of states are providing a retirement plan option for workers who do not have access to a plan through work. As of 2018, 10 states have created retirement plans for the private sector, and more states have made changes since then.

 

So, take a look around. Talk with a financial advisor and ask about the current offerings in your state, if any.

 

It’s Worth It

 

The benefits of investing in a retirement plan can make a big difference in the amount of assets that you can accumulate over time. Take the time to find a plan- it’s worth the effort.

Ken Boyd

Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies

(email) ken@stltest.net

(website and blog) https://www.accountingaccidentally.com/

(you tube channel) kenboydstl