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In early 2022, I panicked when I realized I was in my early 30s and only had about $4,000 in retirement savings. After the panic subsided, my solution was to use a side hustle to jump-start my retirement savings. Within two years, freelancing and using his 9 to 5 income allowed him to increase his retirement savings by more than $100,000. Here are some strategies I used to achieve my goals.
1. Draft your retirement plan
For years, I didn’t really think about when I wanted to retire or how much money I needed. I started by reading online articles and using retirement calculators.
Planning for retirement was a cathartic process. The challenge for me was to think about what kind of lifestyle I wanted in retirement and how much it would cost. I only had about $4,000 in savings, so it was a shock to my nervous system at first. I arrived at this number by inputting my ideal retirement age, life expectancy, monthly contributions, monthly budget, and other variables into a retirement calculator.
The retirement calculator also helped me analyze how much I needed to save each month to reach my lofty goals.
2. Create an investment strategy
Before looking for freelance work, I wanted to make sure I had a good investment strategy in place. It’s easy to spend your freelance money before it even hits your checking account. I know this because I’ve done it many times.
“For those working on the side, the go-to accounts for retirement savings are IRAs, Roth IRAs, SEP IRAs, and solo 401(k)s,” says certified financial planner and founder of Abele Wealth Management. says Aleson Tate. Atlanta. These types of accounts can help you maximize your retirement and health care savings.
To reach my monthly savings goal, I planned to divide my side hustle income into five pots. Emergency savings funds in high-yield savings accounts, 401(k)s, IRAs, health savings accounts, and standard brokerage accounts. I also planned to maximize allowable contributions to my 401(k), HSA, and IRA as my income increased.
3. Budget
Eventually, I found multiple consistent freelance writing jobs with a focus on securing well-paying clients who would provide consistent work over an agreed upon period of time. I am a regular contributor to several online platforms, and I also have private clients for whom I provide articles. I used job boards, cold emails, and eavesdropped on my network. Although most of my freelance income was stable, some contracts were not renewed. This meant that I needed to create a solid budget and review it regularly to stay on track with my savings goals.
Tate suggests using a 50/30/20 budgeting system to manage your side hustle income, and NerdWallet recommends this for your primary income as well. This way, 50% of his take-home income goes toward needs, 30% toward wants, and 20% toward savings, debt, and investments.
“Each person’s percentage should be tailored to their own lifestyle and financial priorities,” Tate says. “But it would be a really great starting point.”
Budget allocations were frequently adjusted. Some months I invested so much that I didn’t have enough in my emergency fund, and other months I didn’t have enough left over to pay my bills. I’ve gone overboard on the leisure and self-care bucket several times and had to reduce my savings in months when my side income was low.
4. Plan your taxes
During my first year of actively working on the side, I was looking for instant gratification as my retirement savings grew. I decided to prioritize my savings and waited until tax time to pay Uncle Sam a lump sum. He should have read his IRS details on self-employment taxes before making that decision. If you had read this, you might have avoided the penalty you had to pay that year.
The self-employed tax rate is 15.3% in 2023 and 2024. To avoid an underpayment penalty, you generally must pay less than $1,000 in taxes after withholding and refundable tax credits. Or you must have paid withholding and estimated taxes of 90% of this year’s taxes or 100% of last year’s taxes. You can do this by paying your IRS estimated quarterly taxes or by withholding enough taxes from your W2 income.
To calculate this, Abraham Ziade, a certified public accountant and owner of a CPA firm in Pembroke Pines, Fla., suggests using bookkeeping software, an accountant, or a CPA. .
I chose the W2 route and worked with my financial advisor to calculate how much I needed to withhold to avoid another penalty.
I also decided to learn about ways to reduce my self-employment taxes. One of the strategies my tax accountant suggested was to change my business structure from a single member his LLC to an S corporation. If you have stable income and meet the requirements, he says, incorporating your business can help you save on taxes, especially if he chooses an S corporation structure, he says.
Utilizing a self-employed retirement account was another way to reduce taxes. I chose a SEP IRA because it allows me to contribute higher amounts than a Roth. Tate says SEP IRAs are her preferred account because they have lower taxable income and relatively high contribution limits.
That being said, it’s important to choose the account that best suits your financial situation.
This article was written by NerdWallet and originally published by The Associated Press.
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