How many times have you been told to plan for your retirement by opening a savings account and regularly depositing a certain amount of money there? Or perhaps buying some government treasury bonds and relying on the interest afterwards in your golden years?
The sad fact of the matter is that solely relying on any one of these options is not recommended now. The yields are so low, and the inflation rate is so high (and continuing to increase through the years), that you may even end up owing the bank later on.
As a freelancer, you own our business. You don’t have employers who will pay your pension, and the minute you’ll be unable to work, you won’t earn. There are no vacation leaves, no 13th month pay. We get paid when we work. Period.
It’s all the more important then, for you to think about your retirement as early as possible. Consider several factors, including when you’re planning to retire (at 60? 65? 70?), what your plans will be (travel? relocate to somewhere warm?), and how much money you need to be comfortable in your retirement.
The advantage about being a freelancer is that we can even retire as early as 45 or 50, depending on how much we work now and what kind of instruments we invest in for our retirement.
You can look at your retirement money as coming from three sources: guaranteed income, stable income, and investment for growth.
Guaranteed income. A guaranteed income comes from your pension, your Social Security, and annuities. You should start building these up while you’re still young if you plan on relying mostly on these once you retire. Even if you don’t have an employer, you can pay for these, especially the Social Security System, as a self-employed member.
Stable income. The interest rate from savings accounts is almost negligible, so if you want a higher-income account but not as risky as buying stocks, you can consider low-yielding bonds. Keep in mind, though, that you also need to invest in something with a higher yield to keep up with the inflation rate. Experts recommend treating these low-yielding bonds as your asset base since they’re relatively stable, while you earn from higher-income investments.
Investment for growth. Some assets, like real estate investment trusts, can have higher returns but still be a bit safe. REITs are especially good choices for retirement, especially preferred REIT stocks that give an income of around 7 percent annually. Dividends are fixed, so even if inflation goes up, the payment is still the same.
The bottom line, experts say, is to diversify your investment. You can allot majority of your assets on a less risky venture such as buying treasury bonds, but you must also devote a percentage of your assets to something that has a potentially high return.
You don’t even have to manage it yourself. There are many financial experts nowadays who can help you assess your needs and assist you in retirement planning. Always remember that given the current economic climate, planning for your retirement now—not next year, and definitely not in five years—is one of the most important things that you can do while you’re still young.