How Does Going Freelance Change My Retirement Options?
Shannon McNay — It's Complicated
Dear It’s Complicated: Last fall I finally left my day job to pursue a freelance career as a writer and communications coach. Now that I’m self-employed, I need to figure out what to do with my 401(k). To be honest, it’s not a lot of money (about $20,000) and hasn’t performed especially well over the years. It was more like a glorified savings account for me that I used primarily because my former employer matched my contributions. But it’s all I have for retirement.
Once my freelance career gets off the ground, I plan on making regular contributions again, but in the meantime, I’d like to see this nest egg grow, even if it grows slowly and steadily. My bank offers a SEP IRA, but I’ve read that you lose a lot in fees for these types of accounts. Plus, my relatives who work on Wall Street have told me sincerely that I’d be better off putting the money into gold or property rather than to expect a decent return from the stock market over the next few years.
How should I rethink retirement savings now that I work for myself?
It’s complicated—and time to evaluate your options. First, congratulations on your new career! And don’t discount the size of your 401(k). $20,000 is a great start for your retirement savings as you embark on this next stage—and something you can feel good about.
The best thing you can do now is find a financial advisor you trust. Just like you might eventually take on a business coach to help grow your freelance business, you should do the same to grow your money. Your friends and family members may be experts in their fields, but their advice is always going to be a little bit biased, influenced by their own lives and preferences.
If you want to take a deep dive into your finances, look for fee-only advisors who have at least earned the Certified Financial Planner certification. CFPs receive extensive training and agree to adhere to a code of ethics. And by choosing a fee-only advisor, you know the financial products recommended to you won’t be based off a sales quota the advisor might be trying to reach.
Have an introductory call with a few advisors before you decide. Make sure they ask you a lot of questions about your financial goals. This is a relationship that will hopefully endure throughout the years as your money needs and goals change.
However, financial advisors often base their fee off of the client's assets under management, and for that reason, many require asset minimums in the six figures. So, while there are advisors out there who work with lower net-worth clients you’ll have to do some research to find them—make sure to be aware of fee structures and asset minimums when you're shopping around.
Another option to consider is a robo-advisor, which is pretty much what it sounds like: an online algorithm-based investment advisor. This is a hot new product sector and these days you can find robo-advisors everywhere from giant financial companies to Silicon Valley start-ups. Many of these advisors don’t have minimums for assets invested and while they still charge a fee, it is often much lower than those charged by their human counterparts. If that sounds a little mechanical for your tastes, know that the latest innovation is a hybrid of automated investing with personal financial advice (usually in the form of a planning session by phone or a help line). Several outlets rank and breakdown the services of each robo-advisor to help you come up with the best one for your situation.
Here’s what one advisor has to say about SEP-IRAs
All that said, I spoke to an advisor myself to get an idea of whether a SEP-IRA might be a good way to go. Kaya Ladejobi, CFP®, understands this problem both from a professional point of view and from starting her own business after years of working for large corporations.
A SEP-IRA is ideal for high-income business owners because it has a high contribution limit, according to Ladejobi, founder of Earn Into Wealth Strategies, LLC, an advisory firm dedicated to helping young professionals. For the 2017 tax year that limit is $54,000. However, for a new freelancer, a traditional IRA probably makes more sense.
“At this stage in the freelancer's career, the hassle of establishing a SEP-IRA and paying the associated fees is just not worth it when a traditional IRA can meet their needs,” Ladejobi says. (This is assuming you’re financially unable to contribute more than $5,500 per year—the current cap for IRA contributions—into your retirement account.)
And when it comes to rolling funds from your 401(k) into a new retirement plan, “The balance from the previous employer account can be rolled over into a traditional IRA account,” says Ladejobi.
However, you’ll need to be careful with how you proceed to avoid potential tax implications.
“The key thing to remember when doing a rollover is to aim for a trustee-to-trustee transfer. Have the plan administrator from the [previous] employer 401(k) write a check directly to the new custodian of the traditional IRA. This will eliminate the need for the old plan to withhold the 20 percent estimate for taxes,” says Ladejobi.
As for rethinking your savings now that you’re self-employed…
This is never an easy thing to figure out. I was self-employed for almost two years and struggled with meeting my savings goals while waiting on (always late) client paychecks.
I completely understand why you’re not focusing on retirement growth until your business is off the ground. The first year or two are financially tumultuous for almost anyone starting out with self-employment. But hopefully, now that you’re doing work you really love, the desire to retire is many years away.
Now you just need to figure out what that number is that you must hit first before you feel comfortable contributing to your retirement again. If you haven’t yet, write out a monthly budget showing how much you need to earn to make ends meet, then to put money into emergency savings, and then, finally, retirement. And, if you have any debt, push that to the top of the line after bills.
As soon as you hit that total number for several months in a row, automate your retirement contribution. With automatic transfers, saving for retirement will feel just as easy as when your previous employer did it for you. And if you know you’re about to hit a down month that can’t be carried by previous prosperous months, suspend the contribution until you get back to normal.
Finally, something to keep in mind as you work on growing your retirement savings: this is an investment that’s supposed to grow until you retire. It may seem like growth is slow now, but that money isn’t meant to be touched for many more years. While it may be tempting to take bigger investment risks now to jumpstart your retirement account, remember that as long as the growth (minus fees) outpaces inflation by the time you retire, then your investment vehicle is doing its job.
As nice as it would be to never go back and forth on savings and retirement, self-employment requires that flexibility. But as you go, hopefully your business will stabilize and savings goals will get easier and easier to accomplish. Best of luck to you on this journey!
Are you wrestling with money matters? You can reach us at firstname.lastname@example.org, subject line: It’s Complicated. Not all financial questions come with black and white answers—let us help you deal when it gets complicated.