Guide to Saving for Retirement When You’re Self-Employed or Freelance

It’s not easy saving for retirement when you work a full-time job that provides a steady income every month. But if you work as a freelancer, small business owner, or independent contractor? Saving enough for retirement can be even more challenging because your income can vary so much each month.

One month, you might rake in the big dollars. The next? Your income might slow to a trickle. Because your expenses don’t follow the same pattern, saving money for retirement can be a challenge.

When you’re self-employed, you also don’t have the benefit of a 401(k) retirement savings plan into which to automatically deposit retirement savings every time you get paid.

Fortunately, you can still save enough for your retirement years even when your income is unstable. It’s all a matter of planning for your golden years and calculating how much you need to save for retirement each month to get there.

Here are five steps to take to save for retirement when you’re self-employed:

1. Be realistic about your retirement date

Freelancers and independent contractors often say that they can keep working for as long as they need to. But that attitude isn’t necessarily realistic.

“Freelancers are really no different from anyone else,” says Teresa Ghilarducci, economist and director of the Schwartz Center for Economic Policy Analysis at The New School for Social Research in New York City. “They have to get real about how long they will be able to work and how much they’ll need to save to enjoy a comfortable retirement.”

Why the self-employed can’t put off retirement forever

Ghilarducci, author of the book “How to Retire with Enough Money,” says that even the self-employed should bank on retiring sometime around the age of 65. Even if they want to work longer, there is no guarantee that anyone will want to pay them past this age, Ghilarducci says.

“Even though you want to keep working part-time, the labor market changes a lot over time,” Ghilarducci says. “Age discrimination is real. You might not be able to remain in the workforce for as long as you expected.”

This means that you can’t put off saving for retirement — or saving enough each year for your retirement years — just because you think you can work forever.

2. Catch up on retirement savings

If you want to have enough money for retirement, you generally need to save at least 10 percent of your salary every year if you are in your 30s, 12 percent in your 40s, and about 40 percent in your 50s.

What if you haven’t done this because of the fluctuations in your income? Then, it’s time to start putting money in a retirement savings account now.

In case you are older, and you haven’t saved enough money, don’t fret about your past missteps, says Kathy Colby, president of Financial Independents Inc. in Lansing, Michigan. It’s too late to do anything about the past. But you can start putting away more money now. You can also look at your expenses to make sure that you aren’t leaking money unnecessarily each month.

“It doesn’t help to worry about what you haven’t already done,” Colby says. “People say that you should start saving early and often. But that doesn’t do you any good if you haven’t done it.”

3. Build a larger emergency savings fund

ReKeithen Miller, a certified financial planner and portfolio manager with Palisades Hudson Financial Group’s Atlanta office, says that it’s important for those with unpredictable incomes to establish a deeper pool of assets. This will help cover emergencies and serve as a safety net during lean times.

How much freelancers or business owners should save in emergency funds

Once people have this larger emergency fund, they won’t be as tempted to skimp on stowing away money for their retirement because they’ll have the money they need to get them through those months when not as many checks are coming in.

“Instead of the usual three to six months of expenses recommended for an emergency fund, I’d recommend establishing an emergency fund that will cover at least nine to 12 months of expenses,” Miller says. “These funds can be used to tide you over if there isn’t enough income coming in.”

4. Take advantage of retirement savings vehicles besides 401(k)s

While self-employed people don’t have access to 401(k) plans, they can save in a Simplified Employee Pension (SEP) IRA. These savings vehicles, designed for those who do not work for others, have the same basic characteristics as traditional individual retirement accounts (IRAs). But they also allow self-employed people to save on a larger scale.

Contribution limits for a SEP IRA in 2016

For 2016, people can save the lesser of 25 percent of their compensation or $53,000 every year in a SEP IRA. Employees who contribute to 401(k) plans can only contribute up to $18,000 — or $24,000 if they are 50 or older — every year.

Contributions to a SEP IRA are voluntary. Someone having a low-income year can contribute less that year or can deposit nothing at all.

5. Split savings in accounts for various financial goals

Those with unpredictable incomes need to take even more control over their finances than typical salaried employees if they want to make sure they have enough money for retirement. That’s why Kirk Jewell, president of Flint, Michigan-based Global Financial Services, makes sure that all of his self-employed clients create four accounts:

1. A personal checking account

Clients will use this checking account to pay their bills and fund their lifestyles.

2. A savings account

If you’re self-employed, you can build an emergency fund in this account to cover unexpected expenses.

3. A business bank account

Open an account devoted to the business so you can deposit money into this account and use it to reinvest in your businesses for everything from marketing to buying supplies to hiring employees.

4. An account to pay for taxes

Jewell recommends that his clients open an account to cover taxes, an important and too-often neglected expense for the self-employed.

Once self-employed clients fill out these accounts each month, they know exactly how much money they can then deposit into a SEP IRA, traditional IRA, Roth IRA, or other savings vehicle for retirement.

“It is so much easier when you are an employee and you can deposit into a 401(k) account without thinking about it,” Jewell said. “When you are running your own business or are working as a freelancer, you have so much more to think about. Your business is an entity that can take up so much of your time. By having the discipline to set up these four accounts, though, you can help make sure that you will have enough money set aside for retirement.”