A freelancer who ceased contributing to her 401(k) plan after losing her employer match opted to contribute to a taxable brokerage account instead, seeking greater flexibility. She explains her reasons for this life-changing shift.
Leslie Quander Wooldridge, an expert in her field who has reached millions of readers with her writing, editing, consulting, and coaching, halted retirement plan contributions in 2019. Ironically, she is a strong proponent of planning for the future.
Wooldridge even went out of her way to help others understand the importance of investing. She openly discussed her recent hiatus from retirement account contributions, a decision that might seem surprising to many - but works!
The Magic Of Compound Interest
"I started saving for retirement in my 20s via an employer's 401(k) plan," Wooldridge explained. Though retirement was far off for the writer and editor, she recognised the potential of compound interest to enhance her financial future significantly.
The company Wooldridge worked for matched employee contributions to a retirement account but with a delayed vesting period. Despite this, she diligently contributed pre-tax income, wondering whether she'd realise the full employer match. In the end, she didn't.
In her next job, she contributed to a 401(k) with every paycheck. This employer offered a much more generous match—up to 5 percent of her salary with immediate vesting. "I was getting free money, y'all, and it was a great motivator. I could see my retirement accounts growing," she wrote in a Business Insider post.
Wooldridge eventually found a position at an agency that offered a generous 5 percent matching contribution to her retirement plan. With full vesting after three years, she strategically decided to consolidate her previous 401(k) into this plan to benefit from lower fees.
Wooldridge consistently contributed at least the minimum required to secure the full employer match at this job, often exceeding 10 percent of her salary. She focused on maximising savings, growing her retirement nest egg, and reducing her taxable income.
However, when she decided to leave traditional employment for self-employment, she also forfeited the employer match and the ability to contribute to a workplace retirement plan. As a result, she paused contributions to these accounts.
Freelance Life: A Shift in Financial Focus
While Wooldridge could have transitioned to after-tax IRAs as a freelancer, her priorities shifted. The newfound flexibility of self-employment demanded increased financial liquidity. Building a stable freelance business required a financial cushion. Unlike traditional jobs with paid time off, freelancers must often rely on their savings for unexpected expenses or income fluctuations.
This immediate accessibility became a higher priority than long-term retirement savings. Traditional retirement accounts, especially those with employer matches, are invaluable for long-term planning when employed. However, life circumstances can change, necessitating a shift in financial strategy.
Wooldridge's transition to self-employment highlighted the limitations of these accounts. The potential for early withdrawal penalties was a significant deterrent. Additionally, while pre-tax contributions can reduce employee taxable income, business owners often find more immediate tax benefits through qualified business deductions.
That said, Wooldridge knew simply hoarding cash in a savings account wasn't the answer. While liquidity was essential, she was acutely aware of inflation's eroding power. Fiat currency, left idle in a savings account, gradually loses value over time.
A recent BlackRock Read on Retirement report underscored a growing concern: sixty percent of Americans across all generations fear outliving their retirement savings. With inflation adding to these worries, Wooldridge emphasised the importance of diversifying investments. Her portfolio includes index funds, individual stocks, and cryptocurrencies.
While her previous employer-sponsored retirement accounts are steadily growing, Wooldridge is equally proud of her after-tax investments. "And I'm thankful. Because while we continue to deal with economic uncertainty, I can move or withdraw my after-tax funds if I need to — without penalty," she noted.
Adjusting To Life's Changes
A Pew Research Center report revealed a sobering reality: one in five older Americans on fixed incomes is considering returning to work due to rising living costs. In contrast, Wooldridge credits her earlier investments in employer-sponsored retirement plans for granting her a sense of control over her financial future.
"Today I no longer have to work as much as I used to because of my investments. I have more time to see my family and to pursue the media and speaking projects I love. And I know I've positioned myself well for my present situation, and for my future," she added.
While there's no one-size-fits-all approach to retirement planning, Wooldridge's story highlights the importance of flexibility and adaptability. By carefully considering her financial goals and life stage, she has created a strategy that empowers her to navigate the future confidently.
