To be a freelancer, you need to be willing to live on the edge -- financially, that is. The ability to make your own schedule and work from the comfort of your home comes is offset by a glaring lack of benefits and steady paychecks. But just because you're a freelancer doesn't mean you don't deserve a comfortable retirement when it's time to exit the workforce. To save enough, however, you'll have to overcome two challenges: variable income and the lack of an employer-sponsored retirement plan.

If you're a freelancer with dreams of a happy retirement, then here's what you need to do to make that dream come true.

Set aside emergency savings first
If your income isn't consistent, it's critical that you start by setting aside some short-term emergency savings before you begin building your retirement fund. Most financial experts agree that it's best to stash enough money to cover three to six months' worth of expenses, but if you have dependents and a mortgage, then you may want to aim higher.

The extent to which you rely on one particular client or company for work might influence your decision to save less or more for emergency situations. If your work is fairly spread out among multiple clients, then you may not need to store quite as much cash in an emergency fund, as the loss of one source of income might only result in, say, a 20% drop in your income. On the other hand, if you rely on a few key clients to stay afloat, then you could be looking at a 50% loss in income if one suddenly stops using your services.

While it's important to make sure your emergency account is adequately funded, don't make the mistake of keeping too much cash on hand for a rainy day because by doing so, you'll lose out on the opportunity to grow your retirement savings. Once you've hit your target emergency savings goal, you can stop adding to your emergency fund and instead begin focusing on retirement.

Create a budget that prioritizes retirement savings
For freelancers and salaried employees alike, saving for retirement often boils down to putting money aside consistently and as early as possible. But unlike salaried employees, freelancers can't count on matching contributions from an employer to help pad their retirement accounts. For this reason, you'll need to be extra-diligent about saving.

Rather than waiting until the end of a given year to contribute to a retirement account, start by tracking your income and expenses over a few months. From there, figure out how much money you expect to have left over each month on average, and then start transferring that amount to a retirement account on a monthly basis. If you wait until the end of the year to put "leftover" money into a retirement account, then you may realize too late that you've spent your monthly leftovers and have nothing left to spare.

If you have a month where you earn more money than usual, make a point of putting that excess into your retirement savings. That way, if you find yourself underemployed down the line, you won't end up quite as behind on your savings. Let's say you typically earn $4,000 a month, $500 of which is earmarked for retirement. If you net $5,000 in an extra-good month, then you should allocate that extra $1,000 to retirement. If, later in the year, you have a month where you bring home less than your usual $4,000, then you won't fall behind on saving if you're unable to contribute.

Find the right home for your retirement money
Salaried employees have it easy. Most can opt to invest in a company-sponsored 401(k) plan and call it a day, whereas freelancers need to find an alternative. Here are some options to consider for your retirement savings:

  • Solo 401(k): The solo, or individual, 401(k) is similar to traditional 401(k) plans offered by most companies. You can set up a traditional 401(k) or a Roth version. With the traditional version, you contribute money on a pre-tax basis and then pay taxes on the funds you withdraw in retirement. With the Roth version, you contribute after-tax dollars but don't pay taxes on withdrawals down the line. You can contribute up to $18,000 per year ($24,000 if you're aged 50 or older) in pre-tax dollars to your solo 401(k). You can find a plan through a broker or investment company, but beware: Many solo 401(k)s come with high setup charges and annual fees. Furthermore, your investment choices may be limited with a solo 401(k).
  • Traditional or Roth IRA: You can contribute up to $5,500 a year ($6,500 if you're 50 or older) to an IRA, which also comes in traditional and Roth varieties, with the same respective tax benefits. You can open an IRA though most financial institutions and banks, and your fees will likely be lower than those of a solo 401(k). The upside of a traditional or Roth IRA is that you'll typically get far more investment choices than you would with a solo 401(k), and more choice means more opportunity to diversify, which is a very good thing for any retirement account.
  • SEP IRA: Any freelancer can open a Simplified Employee Pension IRA. SEP IRAs work just like traditional IRAs in that pre-tax dollars are contributed up front, and withdrawals are taxed down the line. One of the main advantages of an SEP IRA over a traditional or Roth IRA is a significantly higher annual contribution limit: You can allocate the lesser of $53,000 or 25% of your income in an SEP IRA. Setup and maintenance fees for SEP IRAs tend to be fairly low, and you can open one up at the same types of institutions that offer traditional IRAs.

No matter what strategy you choose to employ for retirement savings, the key is to make it a priority at all times. As a freelancer, you might see your fair share of ebbs and flows on the workload front, but if you commit to storing away retirement money from the start, you'll be more likely to meet your ultimate financial goals down the line.

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