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Personal Finance

How to Save for Retirement When You're Self-Employed or Freelance

September 28, 2016

By Dan Rafter | Money Rates Columnist

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.

When you're self-employed, you also don't have the benefit of a 401(k) retirement savings plan into which to automatically deposit retirement savings every time you get paid.

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'll 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 labor 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 percent of your salary every year if you are in your 30s, 12 percent in your 40s and about 40 percent 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. in Lansing, Michigan. 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's Atlanta office, 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'll 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 retirement savings vehicles besides 401(k)s

While self-employed people don't have access to 401(k) plans, they can save in a Simplified Employee Pension (SEP) IRA. These savings vehicles, designed for those who do not work for others, have the same basic characteristics as traditional individual retirement accounts (IRAs). But they also allow self-employed people to save on a larger scale.

Contribution limits for a SEP IRA in 2016

For 2016, people can save the lesser of 25 percent of their compensation or $53,000 every year in a SEP IRA. Employees who contribute to 401(k) plans can only contribute up to $18,000 -- or $24,000 if you are 50 or older -- every year.

Contributions to a SEP IRA are voluntary. Someone having a low-income year can contribute less that year or can deposit nothing at all.

5. Split savings in accounts for various financial goals

Those with unpredictable incomes need to take even more control over their finances than typical salaried employees if they want to make sure they have enough money for retirement. That's why Kirk Jewell, president of Flint, Michigan-based Global Financial Services, makes sure that all of his self-employed clients create four accounts:

1. A personal checking account

Clients will use this checking account to pay their bills and fund their lifestyles.

2. A savings account

If you're self-employed, you can build an emergency fund in this account to cover unexpected expenses.

3. A business bank account

Open an account devoted to the business so you can deposit money into this account and use it to reinvest in your businesses, for everything from marketing to buying supplies to hiring employees.

4. An account to pay for taxes

Jewell recommends that his clients open an account to cover taxes, an important, and too-often neglected, expense for the self-employed.

Once self-employed clients fill these accounts each month, they know exactly how much money they can then deposit into a SEP IRA, traditional IRA, Roth IRA or other savings vehicle for retirement.

"It is so much easier when you are an employee and you can deposit into a 401(k) account without thinking about it," Jewell said. "When you are running your own business or are working as a freelancer, you have so much more to think about. Your business is an entity that can take up so much of your time. By having the discipline to set up these four accounts, though, you can help make sure that you will have enough money set aside for retirement."

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5 flaws of black-box investing

September 19, 2016

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Quantitative investment formulas, often referred to as black-box investing, have been around for a long time. However, advances in data gathering and artificial intelligence are pushing some of these techniques to new heights of complexity. The question is, does that added complexity bring greater effectiveness?

There are arguments to be made for and against black-box investing. It can play a useful role in your portfolio, but you should understand its limitations. After all, no degree of mathematical precision can guarantee that a strategy will add value.

Why investors choose black-box investing

Here are some of the points that black-box investing has in its favor:

1. Investment discipline

An automated investment approach is one way to take human error and emotion out of investing. Human money managers are prone to straying away from their disciplines. Fear and greed influence decisions. In particular, professional money managers start to rationalize making exceptions when they are under the gun for poor performance. Following an automated formula should remove the problems that result from human nature.

2. A degree of predictability

A quantitative approach will tend to be very pure in terms of investment style. It might have a particular bias, such as towards growth or value investing. But, an analysis of the formula or the principles behind it should make it fairly clear what that bias is. Style purity brings some predictability to the results, and this in turn helps an investor construct an investment program in which different managers play clear, complementary roles.

3. Low management costs

Having a computer picking stocks is much cheaper than a team of analysts researching companies one by one. Additionally, the money management firm should be able to pass this cost savings on to its clients.

4. A high-speed way of identifying inefficiencies

Some strategies work by exploiting arbitrage opportunities created by small market inefficiencies - pricing anomalies in which market valuations become temporarily out of step with those of the same or similar securities.

These anomalies are small and generally short-lived, so the only way to reliably make money by exploiting this kind of thing is to spot them quickly and trade in high volume. Computers are much better suited than human investors to identifying these opportunities and executing decisions quickly enough.

5 ways black-box investing is flawed

Of course, if successful investing could be reduced to a formula, everybody would be following it by now. In actual fact, trying to invest this way does have its complications:

1. Back-fitting data can be deceiving

Promoters of black-box investing often test their formulas with historical data to see how they would have performed. This type of backward-looking test is called a back fit, and the results can be somewhat deceiving. With hindsight, it is not too difficult to devise a formula which would have been successful in the past, but that track record is no guarantee of how the strategy will perform once it is up and running in real time.

2. Conditions change

One of the reasons why back fits do not always carry over to the future is that conditions change. Artificial intelligence techniques are being used to create approaches that can adapt to changing conditions, but those adaptations are still akin to human experience. No matter how much experience is accumulated, the combination of conditions shaping markets is always going to be a little different from what was observed in the past.

3. Investors flock to successful approaches

Another reason formulaic investing has a hard time duplicating past success is that investors tend to jump on the bandwagon of any successful approach. This popularity starts to remove the opportunity from markets by making valuations less attractive.

4. Lack of transparency

Black-box investment managers have a dilemma: They need to describe their approaches without providing so much detail that their clients could simply replicate the approach for themselves. This means that those clients may not know everything about how their money is invested, and the unknown sometimes contains unpleasant surprises.

5. Blind obedience may be dangerous

Long-Term Capital Management was a high-flying hedge fund that went bust quickly and spectacularly in the late 1990s. Its proprietors had so much faith in its investment approach that they applied a high degree of leverage to it. That level of blind faith leaves little room for error.

There is certainly a place for quantitative methods in investing. How heavily to rely on those methods, though, is a tricky question. Taking the possibility of human error out of investing is a tempting proposition. But don't forget that ultimately even black box investors rely on human judgement to devise the right investment formula.

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7 things everyone should know about credit cards

September 16, 2016

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Credit cards are a convenient financial tool. They are also a huge money maker for credit card companies. Whether or not you or the credit card issuer comes out on top can depend on how much you know about how credit cards work.

Credit cards generate billions in revenues in the United States, but you can minimize your contribution to those revenues if you know the following seven things about credit cards:

1. Competitive interest rates are out there

Credit card commercials are a staple of television broadcasts. Your mailbox may be full of credit card offers. It's also hard to visit the bank or go shopping without being offered a credit card.

One thing most of these pitches have in common: they don't mention the interest rate you will be charged. Legally, this has to be disclosed when you sign up for a card, but often that disclosure is treated like an afterthought. By that point, you have probably already started the process of applying for the card.

But remember the credit card market is very competitive, with plenty of opportunities to save money by finding a lower rate. Don't choose a credit card just because an ad got your attention or someone happened to offer it at the right time. The only way to be sure of getting a good deal is to shop around and compare rates.

2. The advertised rate may not be the rate you get

Credit card companies have different interest rate tiers. The lowest rate tiers are available to customers with the best credit, while those with lower incomes or weaker credit histories are assigned a higher rate tier.

So if you have less-than-perfect credit, pay attention to the higher end of the rate range rather than the lower end, and get a quote on which rate would apply to you before you sign up for a card.

3. Watch out for credit card fees

A tricky thing about comparing credit cards is that besides having different rates, some have fees and some don't. The fees can be significant enough that a low interest rate that comes with a fee may not be as good a deal as a slightly higher rate with no fee.

To figure this out, you have to estimate how much of a monthly balance you are likely to keep on your credit card. Then you can project how interest rate expense will compare with the fees. As a rule of thumb, if you tend to keep high balances, you should focus on finding a card with a low interest rate. If you keep little or no balance, then interest rates are less relevant and you should focus on avoiding fees.

4. Rewards may come at a price

Rewards credit cards typically charge higher interest rates than non-rewards cards, so if you keep high balances on your card the extra interest cost could outweigh the value of the rewards.

On the other hand, if you pay your card balance off in full every month, you can reap credit card rewards without ever paying the extra interest - and that really is rewarding.

5. When it comes to rewards, cash is king

Rewards are offered in many different forms, from travel miles to merchandise to cash back. In most cases, when you calculate the economic value of rewards programs, they work out to be pretty much the same. All things being equal, cash back is the best form of reward. It gives you the flexibility to spend your rewards however you like - or even take the radical approach of saving the money.

6. Minimum payments maximize credit card company profits

Minimum monthly payments seem very reasonable because they are generally quite low compared to the balance owed, but they are so low because they are designed to make you pay interest over the longest time possible. Make more than the minimum payments, or else you will be maximizing the interest you pay.

7. Zero-percent balance transfer does not always mean free

These are attractive deals to people who carry long-term balances and want to reduce the interest they are paying, but watch out. The zero-percent interest rate is usually temporary. There is often a fee for transfers that can outweigh the money you would save while the zero-percent rate was in effect.

Knowledge is power. Using your knowledge to shop for and use credit cards can give you the power to stop your hard-earned dollars from contributing to the already-huge credit card industry earnings.

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6 mistakes that can knock out your finances

September 14, 2016

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

During the historic Floyd Mayweather-Manny Pacquiao fight there was no knockout, but your finances may not be able to take a punch quite as well. It is always a good idea to be aware of what could knock out your finances and drain savings accounts because boxers who know where the punch is coming from have better chances of keeping their defenses up.

Here are six common problems that can deal a knockout punch to your finances:

1. Credit card dependency

Americans owed a total of $729 billion on their credit cards in the second quarter of 2016, according to the Federal Reserve Bank of New York's Quarterly Report on Household Debt and Credit. This also means billions in annual interest sucked out of the bank accounts of credit card customers, all because they got in the habit of charging more than they could readily pay off. Mounting debt burdens and interest charges have knocked out many a household's finances.

2. Student loan debt

A by-product of the weak job market resulting from the Great Recession was a doubling in student loan debt outstanding over the past seven years. Going back to school simply because it is easier than facing a tough job market can put your finances up against the ropes before your career even starts.

3. Overpriced investments

The past 15 years have seen extreme peaks and valleys in tech stocks, real estate, oil and gold, among other investments. Trying to chase these trends can lead you into overpriced assets just when they are poised to collapse - the investment equivalent of walking into a punch.

4. Big mortgages

People like to think big when they buy a house, leading them to sign on to mortgage payments that are a stretch to afford. This is like getting into a fight and expecting not to be hit. If your finances cannot take a little adversity, they'll never go the distance.

5. Career complacency

It happens time and time again in boxing - a fighter gets to the top and loses the edge it took to get there. For more mainstream careers, the equivalent is taking your job and your career for granted. People get to a comfortable income level, and they ease back a bit. The problem begins if you don't keep your skills up to date or put forward a consistently competitive effort. Keep your eye on how well your company is holding up in its markets. Or you might find that your comfortable job gets taken by a hungrier and more aggressive competitor, either from inside or outside your own organization.

6. No financial cushion

It isn't just laziness that dooms some fighters. Others are done in by too much fast living once they become rich and famous. Financially, you don't need to have a drug or alcohol problem to be living on the edge. Any lifestyle that is debt-dependent, makes no room for savings or is just one setback away from defaulting on payments is too close to the edge to be safe.

Notably, Floyd Mayweather has made a huge fortune by being a primarily defensive boxer. You will probably never make Mayweather money, but your finances can be successful if you learn to keep your defenses up.

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Protect your portfolio: 3 big factors of investment risk

September 12, 2016

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Risk management is a prominent aspect of portfolio analysis, and yet it remains frustratingly difficult to grasp. It's not just a question of differing opinions on the best way to control risk - the very definition of risk varies from one expert to another.

In an issue of the Financial Analysts Journal (FAJ), David M. Blanchett and Philip U. Straehl point out that defining risk according to the composition of an investment portfolio may be too narrow a focus. An investment portfolio exists in a larger context of personal wealth, and you should take that context into account in the construction of your portfolio.

As discussed in the FAJ article "No Portfolio is an Island," the following are three of the bigger picture factors that should inform portfolio construction.

Factors for investment risk



The size and reliability of your income should be a consideration in how you construct your investment portfolio. A counter-intuitive aspect of this is that even though you are likely to earn less money in the early years of your career, the income of younger people is generally a bigger factor in total wealth than the income of older people. This is simply because younger people have typically not accumulated as much wealth in other assets.

A $35,000 income to a 24-year-old with no assets (beyond $500 in a savings account) is a more significant component of financial well-being than the $75,000 income of a 50-year-old who has built up a $600,000 retirement portfolio. Therefore, the risk profile of your investments typically becomes a more significant consideration as you get older.

Job security

Another way that employment weighs on overall financial risk is how you make your money. Two people may make the same income, but there is a big difference if one is in a very volatile industry while the other is in a highly secure position such as that of a tenured teacher. In that scenario, the person with the more uncertain income might be well served to have a more conservative investment portfolio than the person with the more secure position.


Your profession also matters in terms of the industry composition of your portfolio. An auto worker might want to be more cautious about a heavy weighting of car company stocks than someone in an unrelated industry. This is because those holdings would essentially represent doubling up on exposure to the auto industry. This is important because employees sometimes tend to be attracted to stock in their own company or industry. However, from a risk-management standpoint, they should be avoiding such holdings.


Owning a home should also be taken into account in portfolio construction because in many cases, that home is a person's single biggest asset.

One aspect to consider is that two people may own homes with similar values, but the weighting of those homes in terms of their total wealth depends on how far along they are in paying off their mortgages. Essentially, as you pay down your mortgage loan, your house becomes a bigger part of your overall wealth. Thus, your portfolio should increasingly be thought of in terms of comprising complementary assets.

The role of home value is also impacted by the volatility of your local housing market. If you live in a market subject to wild price swings, you may want to have a less risky investment portfolio than someone in a more stable market.

Retirement vesting

Finally, vesting towards retirement entitlements should also play a role in how you view risk management. This can be another source of counter-intuitive risk management tactics. One typically thinks of decreasing portfolio risk as one gets older. But, if you view vesting towards Social Security as building up an income-producing asset, other holdings logically can afford to get more rather than less risky.

On a related note, it also depends on whether you are in a retirement plan that entitles you to a specified income, as in the case of a defined benefit plan. Or you have one that is based on the accumulation of assets, as is the case with defined contribution plans such as 401(k) retirement savings. The latter scenario calls for less risk in other investment assets than the former.

As closely as financial risk is studied, there will never be a precise way to measure or even define that risk. Why? Because central to the nature of risk is that it is unpredictable. Still, elusive though an exact mastery of risk may be, examining its characteristics and manifestations can help you prepare for at least some of the possibilities. Additionally, you will be guarding against one of the greatest financial risks of all: complacency.

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