Retirement Advice for Freelancers

[See The 401(k) Match Cut: What It Means for You in Dollars.]

The Freelancers Union 401(k). The New York-based Freelancers Union recently unveiled a 401(k) for its 113,000 members. The plan's contribution limits mirror the solo 4o1(k), but there's no minimum investment. Like most 401(k)'s outside of companies, the plan costs more than usual ($40 to start, plus $11 a month) but remains reasonable and could come down as more participants sign up. You'll have to join the union to be part of the plan, but membership is free, and it includes access to other benefit plans, advice, and job boards. It covers access to target-date funds, monitors IRS compliance, and can accommodate automatic withdrawals from your checking account. "We wanted to be able to spread the costs of administration and expertise across a range of people," says union founder Sara Horowitz. Contributions can also be raised or lowered on a monthly basis, and they can be nothing at all if cash flow slows down unexpectedly.
Who should consider it? Union-friendly freelancers who want a 401(k) plan with easy investing options.

Defined-benefit plans. Pensions—those bastions of old-style corporate America—and freelancing don't go together at first glance, but in some circumstances, setting up your very own defined-benefit plan could make sense. If you're among the lucky few in the freelance world who earn huge amounts of extra cash, a pension lets you save a truly staggering amount each year. Experts say these plans work best for older freelancers looking to dump a ton of money into a retirement account during several flush final years of employment. If you're 45 or older and can reliably predict that several blockbuster years are on the way, you can become your own pension fund. But there are caveats galore: Single-employer plans also often come with an older retirement age. Also, setting up your own pension means hiring actuaries and other experts to help craft the plan, which can cost thousands of dollars, says Joyce Perez, president of Executive Consulting Services, a Maryland-based consultant. Plus, the IRS will most likely impose other restrictions based on your age and income, so navigating the waters of a personal pension makes sense for only a small pool of freelancers lucky enough to end their careers with sky-high incomes. Also, once the actuaries design a plan, you'll be locked into funding it over the course of several years. But the upside could be worth it for one very important reason: There's no limit on what you can contribute. Just decide what kind of future compensation you'll need, and fund it by any amount you choose depending on your salary history and actuarial calculations. When you retire, the maximum annual benefit is a whopping $195,000.
Who should consider it? Older freelancers making big money close to retirement and looking to save a huge amount over a relatively short time.

Parting thoughts on freelance saving: When it comes to freelancing, remember that although planning for retirement is key, being prepared for the unexpected right now might be even more important. That means freelancers' first priority should be keeping a larger buffer between themselves and an unforeseen stretch of tough business-related luck. Lots of advisers say it's a good idea to keep a cash cushion that can fund your current standard of living for six months. For freelancers, that buffer should be even bigger. Maurer advises freelancers to set aside a full year of living expenses: half in cash and half in highly conservative investments that can be liquidated quickly in the event of an emergency.