The modern workforce is undergoing a significant transformation. Gone are the days of lifelong employment with a single company; today’s workers often piece together careers from various freelance gigs or supplement traditional job incomes with freelance work.
While the gig economy offers flexibility and potential earnings, it also poses challenges for retirement planning. Unlike employees with access to employer-sponsored retirement accounts, many gig workers struggle to save adequately for retirement. A recent study by Betterment found that seven out of ten full-time gig workers feel unprepared to maintain their lifestyle in retirement, with three out of ten admitting to not regularly saving for retirement.
So, how can gig workers ensure financial security in their later years without relying solely on gig work? Here are five strategies for saving for retirement in the gig economy.
1. Take stock of what you have
Many individuals lack a comprehensive understanding of their financial situation, making retirement planning a daunting task. It’s essential to begin any retirement savings endeavor by evaluating your existing assets.
Start by tallying the balances in your checking and savings accounts, as well as any dormant retirement accounts from previous conventional employment. Consider cash tips if your gig work involves them, along with any other financial holdings you may possess. You might be surprised by the cumulative value if you haven’t conducted a recent assessment of your finances.
Even if your assets seem minimal, it’s crucial to have a clear understanding of your financial standing rather than proceeding blindly.
2. Establish an Individual Retirement Account (IRA)
If you haven’t already set up a retirement account, it’s essential to do so promptly to start saving for retirement. Without an account, there’s no vehicle to allocate funds toward your retirement goals.
IRAs are tailored for individual investors and can be easily initiated online. If you’re transferring funds from a 401(k), you’ll have several options, as some IRAs require a minimum initial investment (usually around $1,000). Alternatively, if your initial investment is lower than the minimum requirement, a Roth IRA might be preferable, as they often have no minimum balance requirements.
The primary distinction between a traditional IRA and a Roth IRA lies in their tax treatment. Contributions to a traditional IRA are made with pre-tax income, reducing your taxable income in the current year. However, you’ll be subject to income tax on distributions during retirement. Conversely, Roth IRAs are funded with post-tax income, allowing tax-free withdrawals in retirement.
Many gig workers opt for Roth IRAs, especially if their current tax rate is relatively low. This strategy can be advantageous if you anticipate higher earnings later in your career, shielding you from taxes on withdrawals during retirement.
Regardless of your choice between Roth and traditional IRAs, the annual contribution limit for 2018 is $5,500 for individuals under 50 and $6,500 for those aged 50 and above.
- Minimize Investment Fees
For gig workers, optimizing investment returns is crucial, given the typically smaller investment amounts. To preserve portfolio growth, it’s imperative to mitigate the impact of investment fees.
A prudent approach is to invest in index funds, which replicate specific market indices like the S&P 500. These funds entail lower fees as they lack active management, directing more of your investment towards growth.
- Implement Automation
Managing variable income poses a challenge for gig workers when planning consistent contributions to retirement accounts. Leveraging technology can help mitigate this issue.
Begin by setting up automatic transfers of a manageable amount that won’t strain your budget. Whether it’s $50 weekly or $5 monthly, this steady flow into your IRA provides a financial buffer without requiring constant attention.
Additionally, explore savings apps like Digit, which analyze your cash flow and autonomously determine safe savings amounts. Digit then moves these funds into a designated savings account, from which you can transfer to your retirement account seamlessly.
5. Invest found money
A savvy strategy to maximize annual contributions involves redefining how you view unexpected windfalls. Instead of immediately spending windfall money, consider diverting a portion towards retirement savings.
For instance, if you receive a birthday check or a tax refund (less common for gig workers who pay quarterly estimated taxes), allocate at least half of it to your retirement account. Similarly, gig workers frequently receiving cash can establish personal guidelines for allocating these funds. For example, committing to depositing every $5 bill received into retirement savings can reshape your perception of money and bolster your retirement nest egg.
