In his book, Essentialism, Greg McKeown writes, “The only thing we can expect (with any great certainty) is the unexpected. Therefore, we can either wait for the moment and react to it or we can prepare.”
This is how we feel about today’s topic.
Investing is one of those things you probably didn’t learn about in music school.
You may have learned a few things from your parents, but if their job(s) looked different than yours (company career vs. self-employed, for example), their investment strategies may not work for you.
As someone who’s self-employed or an independent contractor who’s not eligible for benefits through a company or organization, you are responsible for figuring out how to save for your retirement on your own.
In this post, we’ll share the basics of investing, how to choose a retirement plan that’s right for you, plus some helpful advice we’ve learned through the years. Let’s get started.
*Disclosure: We get commissions for purchases made through links in this post.
Retirement Plans Through Your Employer
If you work for an orchestra, university, or other organization, you may have access to a retirement plan through your employer. If you do, be sure to take advantage of this. Sometimes your employer will match your contributions up to a certain amount each year (this is free money!).
These accounts are often a 401(k) or Roth 401(k). If you work for a public school or a certain 501(c)3 organization, you may have access to a 403(b) plan.
The primary difference between a 403(b) and a 401(k) is the options you have for investing. With a 403(b) plan, you’re limited to mutual funds and annuities. With a 401(k), you have more flexibility and options.
If you leave the position down the road, it's easy to roll over the balance from any of these to another account. This brings us to our next topic:
Retirement Plans If You’re Self-Employed
If you're a freelancer, a self-employed business owner, or a portfolio career musician without access to an employer-sponsored retirement plan, you can easily create your own.
There are a few different types of retirement accounts. Spend some time researching your options so you can choose what's best for you. Here are a few to consider:
Roth IRA
Current: $6,000 annually, $7,000 annually if you’re over the age of 50
Tax-free when you withdraw (at age 72)
The Roth IRA is a popular choice among self-employed musicians because it's tax-free when you withdraw it. It's cost-effective to pay taxes on the money now vs. 20, 30, 40, or 50 years from now when taxes will most likely be higher.
When you're able to withdraw it at age 72, it will feel like you are withdrawing money from a savings account--no strings attached.
We both have a Roth IRA that we set up in our 20s. We contribute to these monthly. When I first started mine, I was a student, so I could contribute only a couple hundred dollars a month but didn’t fully fund it (i.e. reach the annual contribution limit). Gradually, over the next few years, I increased my monthly contribution until I was able to fully fund it.
Traditional IRA
Current: $6,000 annually, $7,000 annually if you’re over the age of 50
Tax break when you invest, pay taxes when you withdraw
This IRA is very similar to a Roth with one primary distinction: You can invest the money tax-free (it's a write-off that lowers your tax bill when you file your annual tax return), but you have to pay taxes on any amount you withdraw.
SEP (Simplified Employee Pension)
Higher contribution limits: up to 25% of your income ($57,000 limit in 2020)
Tax break when you invest, pay taxes when you withdraw
If you're looking for a way to invest more than $6,000 annually (or if you're making enough that 10-15% of your annual income is more than $6,000), the SEP is a good option. I created a SEP a few years ago that I contribute to whenever I have extra business income at the end of the year.
Like a Traditional IRA, this type of account is tax-free when you invest (a write-off on your annual tax return), but you have to pay taxes later when you withdraw.
Compound Interest
The biggest piece of advice we have is this: start as early as possible.
If you’re reading this and don’t have a retirement account set up, create one today, even if you can only contribute a small amount each month.
Why? Because when you invest your savings in the stock market you can reap the rewards of a little something called compound interest.
Here's a quick definition:
"Compound interest (or compounding interest) is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. Thought to have originated in 17th-century Italy, compound interest can be thought of as "interest on interest," and will make a sum grow at a faster rate than simple interest, which is calculated only on the principal amount." (source)
Compound interest means the sooner you start investing (even if it's only a small amount), the more you'll earn cumulatively. Play the long game.
Financial Advising Services
As a self-employed musician, you have several options for managing your retirement investments. You can:
Hire someone to do this for you
Do it yourself, or
Opt for a robo-advisor, which is kind of a hybrid of the two.
If your parents or someone in your family has a financial advisor, it doesn't hurt to schedule a meeting with them. You can also schedule a one-time session with a financial advisor in your city. They can help evaluate your current financial picture, offer advice, and even help you create a financial blueprint for the future.
And of course, there are online options to consider, as well.
When we first started our investment accounts, we invested with an online investing service that had no-charge ETFs (exchange-traded funds, similar to mutual funds). We researched each fund on morningstar.com before investing and tracked their performance over time. We tried to diversify our portfolios with large-cap growth, mid-cap growth, small-cap, international, and bonds. (They say it's important to diversify and not put all of your money into one thing.)
After a few years of this, I still felt like I didn’t really know what I was doing.
Was my portfolio diverse enough?
Were these the best investment choices?
Should we just hire a financial advisor to manage this for us?
We reviewed our options, did our research, and in the end, decided to move our accounts (Roth IRAs, SEP, and a few regular investment accounts with extra savings) to Betterment, an automatic/guided investment tool (also known as a robo-advisor).
Betterment offers a globally diversified portfolio of index-tracking ETFs. They recommend an optimized portfolio and manage buying and selling the funds in that portfolio for you. They also provide advice based on your goals and the time or amount you want to invest.
How Robo-Advisors Guide Your Investing
With Betterment, there are no transaction fees and they take care of things like rebalancing, reinvesting your dividends, and auto-depositing. The only fee you pay is 0.25% per year for their online advice (want to talk to a real person? You can pay 0.40% per year for that feature).
All that to say, we highly recommend them! Here's a link to explore what they offer.
