Retiring As A Freelancer

TL;DR:

• Most freelancers don’t make plans for retirement

• Assuming you don’t want to work forever, thinking about retirement as a freelancer is essential

• Some options include investing in index funds, annuities, and/or setting up an IRA for yourself

• If you’re thinking of setting up annuities or want some guidance on how annuities could fit into your retirement strategy, book a call with me today!

Setting The Stage

Most freelancers I talk to have no clue what their plans for retirement are. They’ll tell me they don’t want to work forever but also won’t do anything to prepare for their old age.

If you’re a part of that crew, listen up because I’ll give you the exact blueprint to retire as a self-employed freelancer.

I’ll include different financial products you can use, how much you should set aside, and more tips in the simplest terms possible.

The different tools (+ Their Pros & Cons)

Okay, so you have a few options when it comes to tools available to help you retire. Here are some of the most popular options.

1. Bank Savings account

This is probably the most obvious method. Put your money in a bank and enjoy the 1% interest.

In theory, this is enough to help you. But is it really? First off, most people I’ve seen try to use this strategy end up dipping into their savings account every time they need money.

If you think you’ll be a part of the responsible crowd that won’t touch the money for the next 20, 30, 40+ years then you’ll probably be fine. The rest of you might want to consider another method.

Second, you can earn way more than 1% interest annually with some of these other tools I’m about to mention.

I would write the steps on how to set up a savings account but if you’re a freelancer you’re probably tech savvy enough to figure it out.

2. Index Funds - S&P 500

For those of you who know the name Warren Buffet, you already know where I’m going with this. If you don’t know who Buffet is or what index funds are, I’m about to give you the simplest explanation on the internet.

When it comes to putting money in the stock market, you can buy individual pieces of specific companies (i.e. I buy shares of Apple) or you can buy a basket of different companies (i.e. a little bit of Apple stock, a little bit of Microsoft, etc).

By buying the basket (i.e. the index) you don’t lose money when one company messes up and their stock goes down.

So if you put $100 into an index fund with the top tech companies, one company’s stock going down won’t have a massive impact on your investment.

Meaning if you had $100 invested into one specific firm like Samsung, once something bad happens like phones exploding you would lose most of your investment. Whereas the $100 in the index fund would be safe & sound.

The most popular index fund and the one investment gurus won’t shut up about is the S&P 500. A basket of the largest 500 companies in the US stock market essentially.

The yearly return rate of investing in something like the S&P 500 is 10.26%. So if you put in $1,000 and contributed $500 every month, in 10 years you would have $100,000~. In 20 years that would be $350,377 and $1,004,413 in 30 years.

Before I give you the steps on how to invest in the S&P 500, let’s go over why you might not want to invest in the S&P 500.

Investing in the index fund directly means you’ll need to end up paying capital gains taxes (15%~) whereas if you invest with another financial product, you could pay way less in taxes.

Follow this guide on how to get started.

3. Annuities

Annuity is a big word and it’s a word that most don’t know. Here is the basic gist of it, not everyone can handle having all of their retirement money in cash as soon as they retire.

So an annuity is a type of insurance where you make payments to the insurance carrier as time goes on and when you retire you receive consistent monthly paychecks from the insurance carrier.

Knowing how to spend all of your insurance money is tough and the last thing you want is spending all the money too soon. After all, who wants to be the 70-year-old working at Walmart because you ran out of your retirement money?

Annuities fix that by giving you the money over time so you don’t run out of money in your old age. Depending on your policy’s terms, you will likely keep getting cheques from the insurance company until you die.

One big important thing to keep in mind about annuities is your terms matter and they matter a lot. If you work with the wrong agent, you could end up paying crazy amounts in fees.

To avoid overpaying, you need to work with the right agent. If you want to look into annuities for retirement, book a call with me.

4. IRAs

You’ve probably heard about these. IRAs are usually split into two - Roth IRAs and Traditional IRAs.

With Roth IRAs, you essentially pay taxes now and get tax-free withdrawals later on. Whereas with traditional IRAs you skip on paying taxes now and pay taxes when you withdraw the money.

The thing about IRAs is you won’t be able to withdraw the money until you’re 59 years old. If you do try to withdraw before 59, you will receive a 10%+ tax penalty.

Another problem is you’re not protected from market downturns with IRAs. So your money is usually invested into index funds or ETFs and if there is a market downturn you could lose a significant chunk of your money.

You can offset the risk of market downturns with the following financial tool. Here is a guide on how to set up IRAs.

5. Indexed Universal Life (IUL) Policies

Again, I know these terms may be unfamiliar and intimidating to you but I’ll make them easy to understand.

IUL policies have quite a few advantages.

1. Your money is invested into an index fund like the S&P 500

   1. The advantage of an IUL over investing in an index fund directly is

      1. Your gains will be tax-free with IULs (the only catch being you can start withdrawing money when you’re 59)

      2. When there is a downturn you will be protected with the 0% floor set by insurance companies. Meaning if you invest in the index funds directly and there is a downturn, you lose money. With IULs, there is a floor to protect you from those downturns.

2. You can take cash out of the policy at any time, essentially making yourself your own bank.

   1. These work like a 0% loan where if you don’t put the money back your coverage amount may decrease

3. Unlike other tools, not only do IULs help with retirement but they also have a life insurance aspect

   1. Meaning your loved ones are given a tax-free cheque if you die to ease to burden

   2. But while you’re alive an IUL essentially helps you become your own bank and grow your money via investments without also requiring you to pay taxes.

These are only some of the benefits. Much like annuities, if you work with the wrong agent you could end up overpaying since a good portion of agents out there are more concerned about chasing bigger commissions.

If you’re interested in looking into IULs for retirement and its life insurance benefits, book a call with me and we’ll get you the perfect policy.