One of the most significant drawbacks to contract or freelance work, and some part-time work, is a lack of employer-provided health insurance and retirement plan options. Many full-time salaried workers enjoy the security offered by such benefits. Yet, freelance workers risk facing hefty medical bills or an underfunded retirement if they don't address these issues.
With that in mind, let's examine health insurance and retirement plans for workers who cannot rely on employer-based options.
Planning for a Secure Retirement
If you aren't fortunate enough to have a defined benefit pension or 401(k) retirement account through your work, there are still various options to help you prepare for your post-work life.
First and foremost, it's crucial to break the cycle of "lifestyle inflation." Many people fall into the trap of spending more as they earn more rather than saving the additional income. They opt for a bigger house, a newer car, or more luxury goods rather than increasing their retirement contributions.
Avoiding this pitfall is especially important for independent workers. Salaried employees often have the advantage of automatic insurance and retirement savings deductions. When the responsibility falls entirely on your shoulders, it's easy to deprioritize saving in favor of more immediate wants and needs.
One of the best ways to ensure you're consistently saving for retirement is to "pay yourself first." Treat your retirement contributions like any other bill—a non-negotiable expense that you budget for each month. Open an Individual Retirement Account (IRA) and set up automatic monthly transfers from your checking account.
There are two main types of IRAs to consider: traditional and Roth. With a Traditional IRA, your contributions are tax-deductible in the year you make them, but you pay taxes on the money when you withdraw it in retirement. Roth IRAs work the opposite way - you contribute post-tax dollars, but your withdrawals in retirement are tax-free.
For 2024, the annual contribution limit for both types of IRAs combined is $7,000, or $8,000 if you're 50 or older. If you're self-employed and have no employees, consider a Solo 401(k), which allows you to contribute up to $69,000 plus an additional $7,500 if you're over 50.
Whichever route you choose, the key is to start early and contribute consistently. Even small amounts can add up significantly over time thanks to the power of compound interest. Aim to save at least 10-15% of your income for retirement. If that seems out of reach, start with what you can afford and increase your contributions by 1-2% each year until you reach your target savings rate.
Navigating Health Insurance Options
Finding affordable health insurance has long been challenging for many freelancers and part-time workers. Before the Affordable Care Act (ACA), individual health insurance plans were often prohibitively expensive or unavailable to those with pre-existing conditions.
The ACA has made health insurance more accessible for millions of Americans. Under the ACA, you can purchase health insurance through federal or state marketplaces, and you can't be denied coverage or charged more due to pre-existing health conditions.
If your income is between 100% and 400% of the federal poverty level, you may qualify for subsidies that lower your monthly premiums. For 2024, that means an income between $15,060 and $60,240 for an individual. You may also be eligible for cost-sharing reductions that lower out-of-pocket deductibles, copayments, and coinsurance costs.
To see your options and potential subsidies, visit Healthcare.gov or your state's marketplace website. Open enrollment typically runs roughly from October to January each year (exact dates vary by state). Still, you may qualify for a special enrollment period if you experience certain life changes, such as losing other coverage, getting married, or having a child.
If your income is below 138% of the federal poverty level (in states that have expanded Medicaid), you may qualify for Medicaid, a public health insurance program. Eligibility and coverage vary by state, so check with your state's Medicaid office to see if you qualify.
Medicare provides various health insurance options for those over 65. You can sign up for Medicare during a seven-month Initial Enrollment Period, which starts three months before your 65th birthday.
If you're a high earner, you might consider a high-deductible health plan (HDHP) paired with a Health Savings Account (HSA). With an HDHP, you pay a lower monthly premium but have a higher deductible. You can use tax-free funds from your HSA to pay for out-of-pocket medical expenses, and any unused funds roll over from year to year. Plus, once you turn 65, you can withdraw HSA funds for any reason without penalty (though you'll pay ordinary income tax on non-medical withdrawals).
Don't Neglect Disability and Life Insurance
Health insurance isn't the only type of coverage freelancers and part-time workers need to consider. Disability insurance, which replaces a portion of your income if you cannot work due to illness or injury, is also worth considering. As a freelancer, you don't have the safety net of employer-provided disability coverage or paid sick leave.
There are two main types of disability insurance: short-term, which typically covers you for a few months to a year, and long-term, which can cover you for several years or until retirement. You can purchase individual policies or, in some cases, access coverage through professional associations or unions.
Life insurance is another consideration, especially if you have dependents who rely on your income. Term life insurance, which covers you for a set period (such as 10, 20, or 30 years), is often the most affordable option. The coverage you need depends on factors like your income, debts, and future financial obligations.
Putting It All Together
Navigating insurance and retirement planning as a freelancer or part-time worker can feel overwhelming, but it's essential for your long-term financial health and security. By prioritizing these needs and taking advantage of the options available, you can create a robust safety net that will serve you well in times of need.
Remember, the earlier you start planning, the more time you have to benefit from the power of compound interest and weather any market fluctuations. Make a plan, automate your savings and contributions where possible, and review your coverage and investments regularly to ensure they align with your needs and goals.
It is also important to educate yourself on your rights and advocate for yourself if needed. Familiarize yourself with the terms of your health insurance policy, and don't hesitate to appeal denied claims or negotiate medical bills. Keep detailed records of your income and expenses for tax purposes, and consider working with a financial advisor or accountant to optimize your retirement and tax strategies.
The Takeaway
While the path to financial security may be more complex than it is for traditional full-time employees, with careful planning and diligence, freelancers and part-time workers can achieve a secure and stable financial future. The key is to start now and stay the course, even when the road gets bumpy. Your future self will thank you.
