Get Ready to Retire

B.L.A.C. READER: What is the best way to save for retirement if you are an artist and pay is sporadic?

BRIDGFORTH: I love that you are making yourself a priority and establishing a mindset of discipline. This is critical, no matter how you earn a living.

Interestingly, a survey by Putnam Investments reveals three behaviors that have the greatest impact on the size of Americans’ nest eggs: a consistent, long-term saving and investing strategy, working with a financial advisor and saving money through a workplace retirement plan. (In this column, I will address establishing a long-term saving strategy. Next month, I will tackle how to choose a financial advisor.)

Of course, an employer’s retirement plan is not applicable to you, like many other people. Many self-employed individuals and commission sales people have the same concern as you about retirement.

The short answer to your question is, whatever amount you can afford to save on a consistent basis, even if it is as little as $50 per month, and set up an automatic transfer from your checking account into a retirement savings account as soon as possible. You can always increase the amount later or make additional deposits throughout the year.

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It is also important to set realistic goals for your retirement plan. Ask yourself, “What does my lifestyle cost now?” Create a detailed budget to identify your expenses.

Next, extract your basic, bare minimum expenditures. This amount is your must-make minimum monthly income for now. During months when cash flow is more lucrative, you need to continue following the minimum monthly spending plan and save any excess.

Determine what expenses you are willing to sacrifice now in order to save more for your future retirement. For example, can you cut back on costs for clothes, dry cleaning or hair care, knowing you’ll need that money in the future if the price of necessities like gasoline increases or if you’ll want to travel when you retire?

After determining how much money you can afford to put away monthly, consider investing in one of these common retirement products:

Traditional IRA

This type of individual retirement account provides tax advantages now. Money you contribute may be fully or partially tax-deductible, depending on your income. Generally, your contributions and earned interest are not taxed until you withdraw funds after age 59 ½, at which time you will have a lower tax rate. Annual contributions to this account can be up to $5,000 or 100 percent of your earned income, whichever is less. If you are age 50 or older, you may make additional contributions to your IRA up to $1,000 above the annual maximum.

Roth IRA

This is an individual retirement plan that allows you to contribute after-tax income. When funds are withdrawn after age 59 ½, you will not have to pay taxes on your earnings. Contributions to this type of IRA are not tax-deductible since you already paid taxes on this money. The same catch-up provision-up to $1,000 above the annual maximum contribution for a total of $6,000-applies here as with the traditional IRA. Some eligibility restrictions do exist, based on income level, for Roth IRAs.

Simplified Employee Pension Plan (SEP) IRA

This is a retirement plan that a self-employed individual can open or a small business can establish for the benefit of its employees. You are allowed a tax deduction for contributions you make. Like a traditional IRA, contributions to a SEP IRA are tax-deductible. The maximum amount you can contribute annually to a SEP IRA is $49,000.

No one should depend solely on Social Security-whether you are self-employed or have worked for someone else your entire career. According to a 2010 study by the Employee Benefit Research Institute, a nonprofit, nonpartisan, Washington, D.C.-based organization, more than 40 percent of baby boomers are at risk of not having enough retirement income to pay for even basic retirement expenses like uninsured health care costs.

While I advise seeking help from a financial professional to plan for your future, a good online resource that can get you started preparing for retirement on your own is SmartMoney.com/Retirement/Planner.

It is almost inevitable that self-employment income fluctuates. For independent artists and all other self-employed individuals, I recommend that you set a high expectation for yourself. Do not buy into the starving artist belief system. And don’t wait to prepare for your golden years. If you don’t have a retirement plan in place already, it’s imperative that you make setting up your savings strategy a top priority.

GLINDA BRIDGFORTH IS THE AUTHOR OF “GIRL, GET YOUR CREDIT STRAIGHT!” AND FOUNDER OF BRIDGFORTH FINANCIAL AND ASSOCIATES, LLC.

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