What does your post-work future look like? A cottage by the bay, a cabin in the woods, or the freedom to travel without a fixed residence? Maybe the idea of retiring doesn’t resonate, or perhaps it’s something that you haven’t considered yet. Recently, I had a chat with a veteran tour accountant who was reflecting on a conversation he had over coffee. He and a friend were trying to figure out why so many of their peers were not doing well in their post-work lives—many were financially unstable and in poor health. They realized they were fortunate because they had been taught the importance of looking to the future and saving from an early age. He explained that saving for the future is not just about putting money aside; it is about a mindset that values tomorrow as much as today. They attributed their own financial security to these early lessons, along with smart investing and finding a good accountant to provide tax planning and not just tax return prep.
A Little History
Financial responsibilities have evolved over the generations. Our parents and grandparents often benefited from company-provided pensions and more comprehensive health benefits than we typically see today. They also placed greater trust in Social Security and Medicare to support their retirement. In contrast, we now must take a more active role in planning and funding our retirement and healthcare.
Why Is It So Complicated?
If managing money were purely mathematical, we would all excel. However, finances are deeply personal. When you’re handling your finances, you’ve got to make choices that are right for your specific circumstances which may include maintaining a higher cash reserve (especially in this industry), choosing to rent rather than buy a home, or working a couple of extra years to pay off a home. It’s important that these decisions reflect your personal situation and not just what is the norm, or what your family or friends might project. Money is more than just a tool for transactions; it’s a powerful symbol that can represent security, power, or even love. Our financial decisions are deeply influenced by these values. As humans, we constantly adapt to our resources and compare ourselves to others. This dynamic makes navigating our financial choices particularly nuanced.
The Unique Challenges of the Music Industry
The music industry adds another layer of complexity to financial planning. In this fast-paced environment, you might receive large paychecks during the touring months, giving you a false sense of financial security. This can be misleading because a tour might only last five months out of the year, requiring you to make that income last longer. Some will line up other gigs to cover the off months, while others might go on unemployment and feel discouraged. Per diem payments can also play tricks on your mind, as having that extra few hundred dollars per week can make you feel financially comfortable and able to afford luxuries. Many people I speak with say that one of their keys to success is saving their per diem money. Convenience is also costly—whether it’s ordering food through Door Dash or grabbing meals and drinks on the go. And lastly, the gig life is unpredictable, and we have seen tours get canceled, especially this year, causing that expected income to disappear. These obstacles might make it seem impossible to plan, but they underscore the importance of having a solid financial strategy.
Outlining Your Plan
How do you figure out how much you might need in retirement? As a financial planner once told me, “You will never be upset that you have too much money in retirement.” A good rule of thumb from Fidelity suggests saving 1x your income by age 30, 3x by 40, 6x by 50, 8x by 60, and 10x by retirement. This means saving about 15% of your pre-tax income. To dive even deeper, take time to think about your dreams, goals, and responsibilities. Then, plan how to achieve them by saving as much as you can, investing in a way that feels right for your level of risk, and protecting what you have built with things like insurance and an estate plan. If you have not started yet and this feels overwhelming, start small. The key is to begin, even if it means just setting up an account and moving $50 a month into the account.
The Power of Compound Interest
Why is investing so powerful? Because compound interest allows your money to grow more significantly. This coupled with time can be your secret sauce, especially for younger people. Unlike simple interest, which is only calculated on the initial amount you invest, compound interest is calculated on both the principal and the accumulated interest from previous periods. Think of compound interest like a snowball rolling down a hill. When you start with a small snowball (your initial investment) and begin to roll it down a hill, it picks up more snow (interest) as it goes. The further it travels, the bigger it gets, and the more snow it collects with each roll. Eventually, the snowball becomes enormous, much larger than it was at the start.
Overcoming Human Barriers
So how do you find the funds to invest? You need to start by saving. But why is saving so challenging? One reason is that instant gratification is simply more appealing than delayed gratification. Plus, retirement, often a distant thought, doesn’t deliver the immediate dopamine rush that spending does, making it less enticing to our brains. However, we can tackle this with some clever strategies. One approach is to visualize your retirement—even if it seems far off and abstract. Next time you’re tempted to spend impulsively, pause and consider whether this purchase aligns with your long-term goals (like that lake house or dream trip you’ve imagined).
Another effective tactic is to automate your savings. This makes your money essentially untouchable, easing the temptation to spend it. For example, on a tour I worked with, a crew member discovered he was automatically enrolled in a 401(k) through the band. (I wish all tours did this!) For freelancers, automatic enrollment isn’t an option, making self-advocacy crucial. Determine how much you can realistically save each month and decide where to allocate these funds. Embracing the “pay yourself first” philosophy means prioritizing allocations to taxes, emergency savings, and retirement before addressing other expenses. Setting up your budget in this manner ensures saving is not merely an afterthought or something done if there is extra money at the end of the month (which often there is not).
Retirement Options for Freelancers
Many freelancers wonder about the best way to save for retirement without employer-sponsored plans. Options include Traditional and Roth IRAs, SEP IRAs, Solo 401(k)s, and SIMPLE IRAs, each with unique features suited to different financial situations and goals.
- Traditional IRA
(Individual Retirement Account)
- Pre-Tax Contributions: Contributions are made with pre-tax dollars, which can lower your taxable income.
- Tax-Deferred Growth: Investments grow tax-deferred until withdrawals begin, which are then taxed as ordinary income.
Contribution Limits: For 2024, the contribution limit is $7,000 per year, or $8,000 for those 50 and older.
- Withdrawal Age: Penalty-free withdrawals can begin at age 59½.
Deductibility: Deductibility of contributions may be phased out based on income levels, especially if you or your spouse have access to a workplace retirement plan.
- Roth IRA
- Post-Tax Contributions: Contributions are made with after-tax dollars.
- Tax-Free Growth: Investments grow tax-free, and withdrawals in retirement are not taxed.
- Contribution Limits: Same as Traditional IRA.
- Income Limits: Contributions are subject to income limits; high earners may not be eligible to contribute directly.
- Early Access: Contributions (not earnings) can be withdrawn at any time without penalty.
- SEP IRA
(Simplified Employee Pension)
- Designed for Self-Employed and Small Business Owners: Ideal for those with few or no employees.
- Contribution Limits: Allows employer contributions of up to 25% of income or $69,000 for 2024, whichever is less.
- Pre-Tax Contributions: Contributions are made pre-tax, reducing taxable income.
- Simple Setup: Easier to set up and maintain with fewer administrative duties than a Solo 401(k).
- Solo 401(k)
- Contribution Limits: Allows a total contribution of up to $69,000 for 2024 (including employee and employer contributions), with an additional $7,500 catch-up contribution if 50 or older.
- Roth Option: Offers a Roth option, meaning you can opt for taxed contributions now and no taxes on withdrawals in retirement.
- Loan Features: Participants may borrow from their Solo 401(k), unlike SEP IRAs.
- Suitable for Self-Employed with No Employees: Except for a spouse who works in the business.
- SIMPLE IRA (Savings Incentive Match Plan for Employees)
- Designed for Small Businesses: Suitable for businesses with fewer than 100 employees.
- Employer Contribution Required: Employers must either match employee contributions or contribute a fixed percentage of all eligible employees’ pay.
- Contribution Limits: Up to $16,000 or 100% of their compensation for 2024, whichever is less, with a $3,500 catch-up contribution if 50 or older.
- Easy to Set Up and Low Maintenance: Less paperwork and lower administrative costs than a 401(k).
Summary
Choosing the right retirement plan depends on several factors, including your income level, whether you have employees, and your retirement goals. Traditional and Roth IRAs are great for individuals looking for straightforward options with significant tax advantages. SEP IRAs and Solo 401(k)s are more suited for self-employed individuals or small business owners, offering higher contribution limits and certain business tax benefits. SIMPLE IRAs are ideal for small businesses that want a simple, low-cost plan that also benefits their employees.
Your Future Self Will Thank You
Effective retirement planning requires careful consideration of your personal situation and goals. It’s advisable to consult with a tax or financial advisor to tailor a plan that suits your needs and maximizes your financial potential. I’m here to provide insights and motivation, and I welcome your questions and updates on your financial journey!
You can reach Rachael Bronstein at rachael@lifesjam.com
