It's not easy saving for retirement when you work a full-time job that provides a steady income every month. But if you work as a freelancer, small business owner or independent contractor? Saving enough for retirement can be even more challenging because your income can vary so much each month.
One month, you might rake in the big dollars. The next? Your income might slow to a trickle. Because your expenses don't follow the same pattern, saving money for retirement can be a challenge.
Self-employed people are generally not covered by the Superannuation Guarantee, which makes it compulsory for employers to make a compulsory payment of 9.5% of an employee's salary into their super fund, and aren’t bound by law to make super payments for themselves. But a super can be crucial for your retirement.
Fortunately, you can still save enough for your retirement years even when your income is unstable. It's all a matter of planning for your golden years and calculating how much you need to save for retirement each month to get there.
Here are five steps to take to save for retirement when you're self-employed:
#1 Be Realistic About Your Retirement Date
Freelancers and independent contractors often say that they can keep working for as long as they need to. But that attitude isn't necessarily realistic.
"Freelancers are really no different from anyone else," says Teresa Ghilarducci, economist and director of the Schwartz Center for Economic Policy Analysis at The New School for Social Research in New York City. "They have to get real about how long they will be able to work and how much they will need to save to enjoy a comfortable retirement."
Why the Self-Employed Can't Put off Retirement Forever
Ghilarducci, author of the book How to Retire with Enough Money, says that even the self-employed should bank on retiring sometime around the age of 65. Even if they want to work longer, there is no guarantee that anyone will want to pay them past this age, Ghilarducci says.
"Even though you want to keep working part-time, the labour market changes a lot over time," Ghilarducci says. "Age discrimination is real. You might not be able to remain in the work force for as long as you expected."
This means that you can't put off saving for retirement — or saving enough each year for your retirement years — just because you think you can work forever.
#2 Catch up on Retirement Savings
If you want to have enough money for retirement, you generally need to save at least 10 per cent of your salary every year if you are in your 30s, 12 per cent in your 40s and about 40 per cent in your 50s.
What if you haven't done this because of the fluctuations in your income? Then it's time to start putting money in a retirement savings account now.
In case you are older and you haven't saved enough money, don't fret about your past missteps, says Kathy Colby, president of Financial Independents Inc. It's too late to do anything about the past. But you can start putting away more money now. You can also look at your expenses to make sure that you aren't leaking money unnecessarily each month.
"It doesn't help to worry about what you haven't already done," Colby says. "People say that you should start saving early and often. But that doesn't do you any good if you haven't done it."
#3 Build a Larger Emergency Savings Fund
ReKeithen Miller, a certified financial planner and portfolio manager with Palisades Hudson Financial Group, says that it's important for those with unpredictable incomes to establish a deeper pool of assets. This will help cover emergencies and serve as a safety net during lean times.
How Much Freelancers or Business Owners Should Save in Emergency Funds Once people have this larger emergency fund, they won't be as tempted to skimp on stowing away money for their retirement because they will have the money they need to get them through those months when not as many checks are coming in.
"Instead of the usual three to six months of expenses recommended for an emergency fund, I'd recommend establishing an emergency fund that will cover at least nine to 12 months of expenses," Miller says. "These funds can be used to tide you over if there isn't enough income coming in."
#4 Take Advantage of Government Bonus Contribution Incentives And Tax Deductions
According to the Government-run financial advice website MoneySmart, if you earn less than $51,021 per year (before tax) and make after-tax super contributions, you are eligible to get matching contributions from the government. This is called the government co-contribution.
If you earn less than $36,021 the maximum co-contribution is $500 based on $0.50 from the government for every $1 you contribute. The amount of the co-contribution reduces the more you earn.
If you are self-employed you also can claim a tax deduction on your super contributions. Head over to MoneySmart for details on that.
"Super may not be at the top of your priority list if you're self-employed. But don't leave it too late - putting super money away now will make sure you have enough to live on later," MoneySmart said.
This post originally appeared on MoneyRates.com.