We are currently experiencing a significant economic transformation. In the past, workers could anticipate long-term employment with a traditional employer, but modern workers often need to create a career through multiple gigs or enhance a modest salary from a regular job by freelancing in their spare time.
While it is possible to earn a decent living in the gig economy, this type of work poses a critical risk for gig workers regarding retirement planning.
Many gig workers lack employer-sponsored retirement accounts, resulting in inadequate savings for their retirement years. A recent report from Betterment reveals that seven out of ten full-time gig workers feel unprepared to maintain their lifestyle during retirement, while three out of ten do not regularly save money for retirement.
So, what can gig workers do to avoid working for Uber or taking TaskRabbit jobs well into their 70s and 80s? Here are five strategies for saving for retirement as a gig worker. (Also see: 15 Lucrative Side Hustles for City Dwellers)
1. Take stock of what you have
Many individuals lack a clear understanding of their financial situation, making retirement planning difficult. Begin by assessing the total amounts in your checking and savings accounts, any neglected retirement accounts from past traditional jobs, cash on hand from tips, and any other financial accounts. You may discover that your total assets are greater than you thought.
Even if you find that you have little to no savings, it is crucial to know your financial position rather than proceeding without awareness. (Also see: These 13 Numbers Are Crucial to Understanding Your Finances)
2. Open an IRA
If you don’t have a retirement account to contribute to, it’s essential to set one up as soon as possible. Saving for retirement requires having a dedicated account.
IRAs are designed for individual investors and can be easily established online. If you have funds from a 401(k) to roll over, you will have more options available, as some IRAs have minimum investment amounts (typically $1,000). If your initial investment is below this, consider a Roth IRA, which often has no minimums.
The main difference between a traditional IRA and a Roth IRA is the taxation method. A traditional IRA allows you to contribute pre-tax income, meaning every dollar put in is tax-free until withdrawals during retirement, at which point normal income tax applies. Conversely, Roth IRAs are funded with already taxed money, allowing tax-free withdrawals in retirement.
Many gig workers opt for a Roth IRA due to their current lower tax burden, which can protect them from higher taxes on retirement earnings later.
As of 2018, the annual contribution limit for both Roth and traditional IRAs is $5,500 for those under 50 and $6,500 for those aged 50 and above.
3. Avoid the bite of investment fees
Minimizing investment fees is crucial for all investors, especially for gig workers who likely have less capital to invest. Every dollar needs to be actively working for you.
Investing in index funds can help reduce fees. These mutual funds are designed to track specific market indices such as the S&P 500, eliminating management fees associated with actively managed funds. (Also see: How to Start Investing With Just $100)
4. Embrace automation
The variable income of gig workers can make consistent monthly contributions challenging. Technology can help address this issue.
Set up an automatic transfer of a manageable amount to your retirement account—whether it’s $50 weekly or $5 monthly. This approach allows savings to accumulate without constant motivation.
Consider using a savings app like Digit, which analyzes your checking account’s transactions and determines a safe amount to save automatically, preventing overdrafts. You can then transfer the saved amount to your retirement account.
5. Invest found money
Maximizing contributions can be simpler by changing how you perceive “found money.” For example, if you receive a birthday check, consider spending half and saving the other half for retirement. Similarly, allocate a portion of your tax refund towards retirement savings.
If you frequently receive cash tips, establish rules for those funds too—such as setting aside every $5 bill for retirement savings. This practice can enhance your retirement funds significantly.
