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  1. #1
    Pragmatic Programmer halfasleeps's Avatar
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    How do freelancers retire?

    I'm curious, if someone is a freelancer and works for himself will that person have to work forever or is there a way to retire?

    Sure if they make so much money and become rich they can retire anytime they want. but im not talking about that, what about a freelancer that only makes enough to pay the mortgage and isnt loaded, is there a way he can retire?

    thanks
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    SitePoint Addict Jamieharrop's Avatar
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    That's what a pension is for. Whether your a freelancer or an employee, a pension is a must.
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    Jamie Harrop

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    SitePoint Wizard bronze trophy
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    Start investing your money in things like pensions, property, shares etc etc. How does anyone cope with retirement if not for their investments?

    And if you aren't earning enough to save for a pension, best start working out how to increase your income, fast

    The 3 ways to increase your earnings by 50%:

    1) Increase your prices by 50%
    2) Increase efficiency by 50%
    3) Work harder - do 50% more work each week

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    Word Painter silver trophy Shyflower's Avatar
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    In the US, freelance is a business. You can be a sole proprietor or incorporate (or take on a partner), in any case, if you report your income you must pay both your half of the social security taxes as well as the "employers" share. Optimistically, social security will still be around when you retire and you'll get the same "wonderful" benefits that today's seniors do. (That was sarcastic by the way )

    Additionally, you can open an IRA that is your retirement pension. The best thing to do if you are freelancing is to consult with a CPA who can help you understand your retirement options. Then go find a good financial advisor who can counsel you on the best investments for your income level.
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  5. #5
    Life is short. Be happy today! silver trophybronze trophy Sagewing's Avatar
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    There are lots and lots of options. Contrary to popular belief, there are more options for retirement savings for business owners (or freelancers) than there are for full time employees. The full-blown 'pension plan' is mostly a thing of the past, but you'll find that the limits for 401k's, IRA's, etc. are much more generous when you're working for yourself.

    If you can save, you can retire well.
    The fewer our wants, the nearer we resemble the gods. Socrates

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  6. #6
    Non-Member demosfen's Avatar
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    Work forever sounds about right, at least it has been my plan so far. Either that, or save. Social Security will go bankrupt long before most of us retire and I am seriously considering filling out papers to drop out. Can use extra money for investments

  7. #7
    Webwellwisher Robert Warren's Avatar
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    There are also plenty of marketing and PR firms today that started as freelance outfits. Work hard and long enough, and soon you find that you're hiring an assistant to help you out. Then office space. Then a vice president. Pretty soon you're just stopping in once in a while to make sure the place hasn't burned down.

    Like Shy said, freelancing is a business (at least in the U.S.). Keep growing, keep tackling better jobs and recruiting better clients, and eventually the business itself becomes the investment for retirement.

  8. #8
    Serial Publisher silver trophy aspen's Avatar
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    and I am seriously considering filling out papers to drop out. Can use extra money for investments
    You can do that? Not that I share most of your views, but I definitely agree that SS is going to go bankrupt before I need it unless it is drastically changed. I don't plan on needing it anyways so I'd like to opt out if it'd save me that nearly 15% in taxes.

    Onto the original question...

    In any line of work if you're living from paycheck to paycheck you aren't going to retire well. Save more money. You should have enough money to live on for atleast 6 months in short term liquid assets (stocks, money markets, savings accounts) and then you'll want atleast around 1-2 million saved up by the time your retire, if you want to stop working entirely. Assuming inflation doesn't get out of hand and you don't mind living relatively cheap.
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    ☆★☆★ silver trophy vgarcia's Avatar
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    Quote Originally Posted by aspen
    You can do that? Not that I share most of your views, but I definitely agree that SS is going to go bankrupt before I need it unless it is drastically changed. I don't plan on needing it anyways so I'd like to opt out if it'd save me that nearly 15% in taxes.
    If you're Amish you can opt out of social security and medicare. But that's the only exception I know of.

  10. #10
    Life is short. Be happy today! silver trophybronze trophy Sagewing's Avatar
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    Quote Originally Posted by aspen
    You can do that? Not that I share most of your views, but I definitely agree that SS is going to go bankrupt before I need it unless it is drastically changed. I don't plan on needing it anyways so I'd like to opt out if it'd save me that nearly 15% in taxes.
    Chris - Would elimination of SS really reduce your taxes 15%? For that to be true, you'd have to be paying SS on 100% of your income (roughly speaking) which is avoidable with a good corporate structure. I think you probably know your way around the tax world, but don't you have a payroll/distribution model where you are only paying payroll taxes and social security on a relatively small salary while the rest of your revenue is paid to you in the form of cash distributions, etc? Probably you know all that, but when I see successful self-employed people paying 15% to SS, it makes me cringe!!! One of the best things about being self employed is that you don't have to pay as much tax as the full timers.
    The fewer our wants, the nearer we resemble the gods. Socrates

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    SitePoint Wizard davidjmedlock's Avatar
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    Quote Originally Posted by Sagewing
    Chris - Would elimination of SS really reduce your taxes 15%? For that to be true, you'd have to be paying SS on 100% of your income (roughly speaking) which is avoidable with a good corporate structure. I think you probably know your way around the tax world, but don't you have a payroll/distribution model where you are only paying payroll taxes and social security on a relatively small salary while the rest of your revenue is paid to you in the form of cash distributions, etc? Probably you know all that, but when I see successful self-employed people paying 15% to SS, it makes me cringe!!! One of the best things about being self employed is that you don't have to pay as much tax as the full timers.
    Sounds like I need to talk to your CPA. I paid about $0.30-$0.32 on every dollar I made last year... I've been a bit more careful this year, but I've been considering the corporate route.

    <--- Adds "Call Good CPA" to "To-Do" list...

  12. #12
    Life is short. Be happy today! silver trophybronze trophy Sagewing's Avatar
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    Ouch.. you shouldn't have much problem reducing that... You aren't doing you're own taxes, are ya?
    The fewer our wants, the nearer we resemble the gods. Socrates

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    Non-Member demosfen's Avatar
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    Quote Originally Posted by aspen
    You can do that?
    Technically you can, but there are some issues. This is what I figured so far. There is a form at SSA.gov called Requiest for Withdrawal of Application. The procedure seems to be sending a notarized statement to SSA, saying that you are rescinding your signiture under SS benefit application and refusing SSN, and attaching Request for Withdrawal of Application to it. (If application for SS was made by your parent, s/he will be the one to sign this statement)
    Just sending Request for Withdrawal of Application seems to make you ineligible to draw benefits, but you still would be required to pay SS taxes, because tax liability is created by having SSN rather than accepting benefits. So it has to be deactivated.
    Now the problem is that you will no longer have a SSN, and it's tied to many things. Like, if your state requires SSN to get a driver license, you'll have to get your license from a state that doesn't, etc. And after 9/11 it's difficult to open a bank account without SSN. You can cash checks under $1000 without bank account through alfii.com, but I don't know about checks over $1000. I think depositing them into your wife's/friend's account shouldn't be a problem, as long as you declare them on your tax return

  14. #14
    Life is short. Be happy today! silver trophybronze trophy Sagewing's Avatar
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    How does deactivating your SSN exempt you from the requirement to pay SSN on your payroll or income?
    The fewer our wants, the nearer we resemble the gods. Socrates

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    SitePoint Wizard davidjmedlock's Avatar
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    Quote Originally Posted by Sagewing
    Ouch.. you shouldn't have much problem reducing that... You aren't doing you're own taxes, are ya?
    No, I was smarter than that last year. The guy that did my taxes is very experienced (used to be an IRS auditor, has been a CPA for 30+ years), but I didn't do a very good job of tracking my expenses and such since it was my first year as being completely self employed. This year should be quite different...

  16. #16
    Word Painter silver trophy Shyflower's Avatar
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    Quote Originally Posted by demosfen
    Technically you can, but there are some issues.

    No you can't. The request for withdrawal is if you have filed an application to begin receiving your benefits at retirement and change your mind. It doesn't give you the ability to with hold earnings from Social Security nor does it allow you to "drop out" of the loop. If you read the whole form, you should have understood that.
    Linda Jenkinson
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  17. #17
    Non-Member demosfen's Avatar
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    Yes but like I said, the important part is that you would attach it to a letter rescinding your SSN. It's having SSN that creates SS tax liability, not the fact that you accept benefits. The real issue is the inconvenience of handling things like money and driver license (in states that require SSN to get one) without having SSN

  18. #18
    chown linux:users\ /world Hartmann's Avatar
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    Quote Originally Posted by demosfen
    Yes but like I said, the important part is that you would attach it to a letter rescinding your SSN. It's having SSN that creates SS tax liability, not the fact that you accept benefits. The real issue is the inconvenience of handling things like money and driver license (in states that require SSN to get one) without having SSN
    I don't think the benefits of slightly less taxation (supposedly) outweighs the inconvenience of not having the number. The general assumption that Social Security will be bankrupt in the next few years is also slightly false. Recently the availability of social security has increased and there are still studies being done to determine its estimated life.

  19. #19
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    Quote Originally Posted by Sagewing
    ...don't you have a payroll/distribution model where you are only paying payroll taxes and social security on a relatively small salary while the rest of your revenue is paid to you in the form of cash distributions, etc? Probably you know all that, but when I see successful self-employed people paying 15% to SS, it makes me cringe!!! One of the best things about being self employed is that you don't have to pay as much tax as the full timers.
    Can you provide a link or explain this a little more? Are the cash distributions paid out and taxed as capital gains, or what? My accountant and I may be making you cringe!

  20. #20
    Non-Member demosfen's Avatar
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    Quote Originally Posted by Hartmann
    I don't think the benefits of slightly less taxation (supposedly) outweighs the inconvenience of not having the number. The general assumption that Social Security will be bankrupt in the next few years is also slightly false. Recently the availability of social security has increased and there are still studies being done to determine its estimated life.
    I have 37 years before reaching retirement age, so it won't make much difference whether SS goes bankrupt in 10, 20, or 40 years. In any case, it's a lottery any way you look at it, I'd rather not buy lottery tickets with my retirement money
    You are right about the inconvenience of not having the number, if it wasn't for that I would be out of the system by now.

  21. #21
    Life is short. Be happy today! silver trophybronze trophy Sagewing's Avatar
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    Quote Originally Posted by demosfen
    Work forever sounds about right, at least it has been my plan so far. Either that, or save. Social Security will go bankrupt long before most of us retire and I am seriously considering filling out papers to drop out. Can use extra money for investments
    This is a hackneyed talking-point that everyone seems to love repeating, but it doesn't really withstand much scrutiny. The claim that SS is going to go bankrupt in year 20xx is based on the wild assumption that the government will do absolutely nothing to adjust the program, ever. No living cost increase, no adjustments for inflation, literally nothing. The assumption is that while people slip massively into poverty and starvation, the whole country will stand by. Historically, this has never been the case. In fact, the social security system has been revamped from time to time, as have Medicare and other such programs. I'm not saying that SS is enough for people to rely upon, or that it's a healthy system that isn't in need of reform, but to say with such confidence that it'll be bankrupt is really a questionable predicion based on a lot of guessing.

    There are lots of stats, but almost everyone agrees that the SS system AS IS will be liquid until almost 2040, and some estimates say 2050. At that time, the system will begin running at a deficit, which isn't the same as going 'bankrupt'. Do the math, use a dictionary, and rethink. The SS system needs reform, but your interpretation is flawed.

    Quote Originally Posted by demosfen
    Yes but like I said, the important part is that you would attach it to a letter rescinding your SSN. It's having SSN that creates SS tax liability, not the fact that you accept benefits. The real issue is the inconvenience of handling things like money and driver license (in states that require SSN to get one) without having SSN
    Just because you give up your ssn, you are still obligated to pay ssn on your income as far as I know. I know for sure that if I don't pay SSN on my employee's payroll (and my own) I'll get a letter from the IRS right away (and some massive penalties). In a situation like that, I'd need to provide some legal argument that I am not obligated to pay SSN, and I'd probably need to get it by a judge. I still don't understand how giving up your number means that you don't have to pay.

    Quote Originally Posted by Westech
    Can you provide a link or explain this a little more? Are the cash distributions paid out and taxed as capital gains, or what? My accountant and I may be making you cringe!
    Cash distributions are taxed differently depending on the circumstances. Most of my income comes from shareholder distributions from an s-corp which I own, and that's taken on a special line for s-corp income but it's similar to ordinary income (thats a generalization). So, by giving myself a small but reasonable salary I am able to avoid much of the FICA, SSN, and payroll tax by paying the rest of my compensation as distributions. The individual (solo) 401k allows my to contribute up to 44k each year, and that's above the line, too. My HSA takes about 5k (for my wife and I) and that's also above the line. By retaining as much income as possible in the corp, I can wait until the near-end of the year then figure out how to distribute it - there are lots of ways to do above-the-line expenses that actually result in real benefit to the owner. A good CPA and attorney should be able to set everything for you!
    The fewer our wants, the nearer we resemble the gods. Socrates

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    Very interesting. Thanks for your detailed response. It looks like I (and my accountant) may need to re-evaluate our approach.

    Quote Originally Posted by Sagewing
    By retaining as much income as possible in the corp, I can wait until the near-end of the year then figure out how to distribute it.
    By doing this are you able to avoid paying quarterly taxes and keep your accrued taxable income earning interest for you (not the IRS) over the course of the year?

  23. #23
    Life is short. Be happy today! silver trophybronze trophy Sagewing's Avatar
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    My corp has to pay quarterly estimated taxes to the state of California (just for state tax, which is minimal for an s-corp) and my paycheck has withholding taken out when I get paid each month. To keep things straight for the end of the year, avoid underpayment penalties, and skip quarterly estimated payments my accountant adjusts the withholding so that enough is withheld from my gross paycheck to cover the projected distributions for that year. The effect is that my paychecks usually have about 70% of the gross pay withheld and only 30% paid to me - but it works out better for me that way in the end.
    The fewer our wants, the nearer we resemble the gods. Socrates

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    Word Painter silver trophy Shyflower's Avatar
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    Quote Originally Posted by Sagewing

    Just because you give up your ssn, you are still obligated to pay ssn on your income as far as I know. I know for sure that if I don't pay SSN on my employee's payroll (and my own) I'll get a letter from the IRS right away (and some massive penalties). In a situation like that, I'd need to provide some legal argument that I am not obligated to pay SSN, and I'd probably need to get it by a judge. I still don't understand how giving up your number means that you don't have to pay.

    Indeed! It doesn't. I just looked up every reference to "rescind" on their site and there is nothing about going off the grid. Rescinding benefits is, of course, allowed but even then you must file the appropriate forms (Of course! ) .

    As mentioned before, the only case where you are not obligated to pay SS is when you are part of a religious group such as the Amish. Since Amish income all goes to the church and is dispersed among its parishoners in accordance with their need, it is not taxable (neither income taxable or SS taxable) as far as I can tell.

    However, if anyone here has thoughts of "rescinding" their Social Security, they should consult a good tax lawyer or CPA to learn the implications involved instead of acting on the advice of members of this forum.
    Linda Jenkinson
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  25. #25
    Non-Member demosfen's Avatar
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    Quote Originally Posted by Shyflower
    However, if anyone here has thoughts of "rescinding" their Social Security, they should consult a good tax lawyer or CPA to learn the implications involved instead of acting on the advice of members of this forum.
    It's not an advice, I'm just saying that if someone were to do it this would be the procedure. Giving legal advice without license is a class B misdemeanor here, that's up to 1 year in jail. No, thanks.
    A good lawyer might help, but CPAs have no clue about it, mine gave me a blank stare when I told her that my daughter doesn't have SSN. Not that she's not good, it's just not something CPAs know about
    Amish don't pay SS because they don't have SSNs. If you learn Pensylvania Dutch and move to Lancaster county you'll still need to rescind your SS application to avoid paying into the fund. They do have their own pension fund, but it's not why they are not liable for SS tax. The law doesn't require anyone to be enrolled in a pension fund. It's all about having the number, if you don't have one and send a check to IRS to pay your SS tax they'll return it
    Anyway, I hope to go ahead with this once I rearrange my business so that I can run it without SSN (have to sell part of it to my wife for $1 or something, because some things can't be done without SSN). Ask me in a few months
    Last edited by demosfen; Oct 10, 2006 at 07:08.


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