Whether you are ready for it or not, retirement is inevitable. And equally inevitable is the possibility of outliving your money. In the wake of a decidedly uncertain economic future in the U.S., and with the rise of the freelancers, permalancers, entrepreneurs, independent contractors, part-timers and small business owners in the job market, saving for retirement isn't as effortless as it was just a few years ago.
Freelancers, independent contractors and business owners (yes, that's me too) are retiring without a net. We don't have employer sponsored matched asset plans, 401K's, company sponsored retirement plans -- unless we make them ourselves -- or much of anything else that would serve as a hedge of protection against the scary reality of retirement. When I started working for myself in 2009, I realized that my retirement plan was now entirely up to me. (Gulp).
Step 1: Start Somewhere
After a little research, I found (and then opened) a Roth IRA (Individual Retirement Arrangement) through a broker who I already had another account with. The fees weren't hefty, the opening deposit was to my liking, and I could customize my cash flow and trades to suit me -- a feature that is of paramount importance to me.
Step 2: Weigh the Pros and Cons
Why did I go with a Roth IRA instead of a traditional IRA? Because my contributions are taken from my after tax earnings, meaning that I have already dotted my I's and crossed my T's on those contributions and paid my dues to Uncle Sam while living in a lower tax bracket -- I plan to be in a higher bracket when I retire.
By getting the IRS off my back now, I don't have to pay taxes on my money again when I withdraw them later in life, as I would with a traditional IRA.
And since I am an independently owned and operated taxpayer -- ha ha --, I went with the Roth because I can use it (it's a very fluid IRA), as a secondary emergency fund of sorts. And even though I'd have to pay a penalty in the event I needed to withdraw my funds earlier than age 59 and a half, that fee is still less of a gamble than paying taxes at a higher rate (think inflation) 35 years from now.
Step 3: Know How Much to Save
The maximum amount I can contribute (according to the brain trust at the IRS) to my IRA without paying a penalty is $5,000 a year. That comes out to $416 a month. And while that's a little steep, it's an amount I can handle.
However, because investing isn't exactly my forte, I resolved (after about six months of trial and error) to turn over my investment portfolio to a pro. And, I was glad I did. The $200 annually that I pay to have a pro manage my portfolio took my returns from five percent a year to eight percent a year -- paying his fee in six months.
Being a freelancer, a business owner and an entrepreneur, I usually want to control everything myself, but even I have learned when to call it quits and pass the baton to someone who knows more than I do. And knowing that pays off today, tomorrow and beyond, until the day I'm ready to hang it up and enjoy my retirement.
How are you planning for your retirement?
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