Sunday Mailbag

Q: Working as a freelance artist, how do you financially plan for retirement? As artists, I don’t think most of us ever plan to completely “retire” but by being a freelancer you definitely have to create your own pension. Do you simply put a percentage of your income away each year?

I’m making an assumption here but, seeing how selling your originals in the future might be a part of your income, what are some of the practices you keep when preserving your artwork? I feel like it’s very easy to forget about the future and not have a plan because it seems so far off for beginning freelancers. Is there any advice you’d like to give young whippersnappers like myself when thinking about preserving artwork, retirement or any other aspects of the future?

A: Being self-employed has a lot of advantages but a lot of disadvantages as well. No company health insurance to buy into for example, which leaves the self employed without the buying power of an employer to get their insurance costs down. Another disadvantage is no company retirement program to be able to participate in. All self employed people need to think about the future and make some sort of plan for retirement. You cannot count on Social Security… that program will not survive the retirement of the baby boomer generation and is on the verge of bankruptcy right now.

It’s hard to think about retirement when you are a young person, as it seems so far away, but when you are young is by far the BEST TIME to get a retirement plan in place and start making contributions to it. That’s simply because the longer you have to put money away and let it gain interest/dividends the more money it will be worth at retirement, and the better that money will be able to weather economic bad times like we have been experiencing the last year or so (although things have been looking up recently). Consider this: let’s say you take one dollar and invest it in some mutual fund vehicle that averages a modest 7% return a year. If you invested that dollar at age 45, when you are 65 it’s worth $4.14… a little over 4 times your initial investment. If you invest that same dollar at age 25, when you are 65 it’s worth $16.02, or over 16 times your initial investment and 4 times what your earning power is for the same dollar at age 45. That means that every dollar you invest at age 25 is already worth four times what it would be if you wait until age 45 to invest it.

There are a lot of other reasons to invest as young as possible as well. You can afford to go with more aggressive growth (riskier) vehicles because you have a lot of time before that money is needed and you can handle the more severe ups and downs of those kinds of investments. Over a long period of time the aggressive growth and growth investments yield higher returns, but as they are more volatile you need the longer time periods for the good to average out over the bad years. As you get older your “portfolio” (meaning the list of the various things you have invested in) will need to start easing away from the growth vehicles to the more moderate “growth and income” level investments, and eventually to the much safer but lower yielding “income” investments as you near retirement.

There are a lot of different ways to save for retirement that also provide immediate tax benefits. Things like an individual 401k, or a SEP IRA (Simplifies Employer Pension Individual Retirement Account) provide tax relief on the money you put into the account. There are different rules for how much you can invest a year for the tax savings, various levels of administrative fees and penalties for early withdrawal and other considerations like being able to take out a loan against your balance depending on the type of retirement plan you are contributing to. You can choose what kind of vehicles you invest in within the 401k or IRA, which can be all sorts of different kinds of funds (index funds, b0nd funds, money market funds, stock funds), stocks… there is a lot out there and it can be confusing.

My advice is to seek out a professional financial consultant for a plan. You do not have to pinch and scratch to save for retirement when you are young, as you need the money to do things like buy your first house, start a family, etc. However setting a little aside at a young age really pays off in the end. Find a consultant you trust. Ask older friends and people you respect who might be knowledgeable about investments if they have any suggestions. Don’t use the phonebook… get a referral from someone.

Just remember that the hardest part is doing it in the first place. You don’t have to contribute a set amount or at all if you are struggling, and can put money away as best you can for that far off retirement. Even just a few hundred dollars a year invested when you are in your twenties will be of enormous benefit.

As to the other half of your question, I don’t count on my original art being worth a plug nickel as I get older. I keep it all and occasionally sell or donate pieces, but none of it will really be worth enough for it make it part of my retirement plans.

Thanks to Chris Houghton for the question. If you have a question you want answered for the mailbag about cartooning, illustration, MAD Magazine, caricature or similar, e-mail me and I’ll try and answer it here!