The traditional nine-to-five job is increasingly giving way to freelancing and side businesses. According to Intuit, the gig economy now accounts for 34 percent of the American workforce and is expected to grow to 43 percent by 2020.
The freedom and flexibility that independent contracting affords make it attractive to millennials, but older generations are also taking notice. The typical gig worker, according to a Prudential white paper, is in his late 40s while the average age for the traditional full-time worker is 43. The primary motivator for joining the gig economy is overwhelmingly financial; 44 percent of gig workers included in the report said they pursued gig work to pay the bills. Older workers were more likely to gravitate toward such work for purely financial reasons.
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Even many full-timers do some work on the side to augment their income without sacrificing the employee benefits. “It’s hard to ignore the challenges of the current economic expansion, with high job growth tempered by static or even falling wages,” says Jacob Shea, managing partner at San Francisco-based Structure Capital.
But for those who have embraced gig work full-time, that can be a financial gamble, particularly where retirement is concerned. According to Prudential, the average annual income for gig-only workers ages 56 and older was $43,600. Younger workers, ages 18 to 35, who were full-time independent contractors earned just $27,500 while those ages 36 to 55 made $36,300, on average. Overall, gig workers lag behind traditional full-time workers, whose income averages $62,700 annually.
Lower earnings is one stumbling block to saving enough for retirement and the lack of an employer-sponsored retirement plan is another. Prudential found that 52 percent of full-time workers have access to an employer’s retirement plan. That figure drops to 16 percent for gig-only workers. A quarter of workers who combine contract work with full- or part-time employment have an employer-sponsored plan as a savings option.
Regardless of whether an employer’s plan is available, gig workers aren’t making huge strides saving for retirement. Forty-four percent of independent contractors aren’t saving anything for retirement and 22 percent only do so occasionally, according to a joint report by Aegon and Transamerica. Twenty-five percent said they anticipated retiring at age 70 or older, while 4 percent said they would likely never retire.
Delaying retirement can help compensate for smaller savings, but “relying on gig work later in life isn’t without risk,” says Roger Whitney, a financial advisor and owner of Retirement Answer Man in Fort Worth, Texas. Unexpected family or health problems could derail your ability to work, and there’s no guarantee that your livelihood will always be secure. “Your skill set may become obsolete sooner than you think,” Whitney says.
Although hitting your retirement goals may be more difficult as a fully independent worker, it isn’t out of reach. Your retirement success, though, will depend on how you shape your savings and investing plan.
Recognize that the traditional rules may not apply. The standard retirement savings benchmark recommends saving 15 percent of your income each year. In the gig economy, however, that goal may not always be feasible.
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Tracie McMillion, head of global asset allocation for Wells Fargo Investment Institute in Winston-Salem, North Carolina, says that gig workers may have to adopt a different tactic when their income is inconsistent. Rather than saving a certain dollar amount, these workers may have to scale their savings to fit their income. That may mean saving 5 or 10 percent of their annual income, instead of aiming for 15.
The key is saving at least something consistently. “The amount you put into a retirement account doesn’t matter, as long as you’re putting something into it,” says Brian Mirau, founder and president of Mirau Capital Management, which has offices in New Mexico and Texas. Delaying saving may be the worst mistake contract workers make, as they miss out on the time their investments can compound. Mirau says to think of saving for retirement as climbing a mountain. “If you start early, the slope will be much more gradual, but the later you start, the steeper the climb to get to where you want to be.”
Eschewing traditional rules may also require rethinking how you invest. McMillion says gig workers may need to adjust their asset allocation to account for a longer-than-expected time horizon until retirement. That means taking more risk as you will have more time to recover from market downturns. Younger contract workers may also want to take more risk if they’re saving for retirement in smaller amounts. Essentially, this “lets the markets do some of the work for them,” with the idea that a higher rate of return from a more aggressive portfolio leads to greater assets long term.
Gig workers also should look beyond stocks or mutual funds to generate future cash flow in retirement. “An important investment for the gig worker is in themselves,” Whitney says. “They should allocate a portion of their investment assets toward equipment, skills or support to help them stabilize or increase their income.”
Make every penny count. Taxes and investment fees can take a significant bite out of any investor’s portfolio, but managing these costs is particularly important for gig workers who may be saving at a lower rate. “If you haven’t put a whole lot into your retirement account, you definitely don’t want your savings or gains to be eaten up by extra fees,” Mirau says.
Most contract workers probably won’t have the option of contributing to an employer’s 401(k), but they do have other tax-advantaged savings vehicles at their disposal. A solo or individual 401(k), for example, offers the same tax benefits as a traditional 401(k), including tax-deferred growth and higher annual contribution limits. These plans, which are designed for contract workers and the self-employed who operate as sole proprietors, do have a catch: They may carry higher administrative fees than other tax-advantaged plans.
If you’re saving on a smaller scale, an individual retirement account may be the most cost-efficient choice. Here, though, you have to decide whether the tax-deductible contributions associated with a traditional IRA are more valuable than the tax-free withdrawals you’d enjoy with a Roth IRA.
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No matter which savings vehicle you choose, keep an eye on investment fees. If you’re inexperienced choosing investments, you may want to get help from an advisor, McMillion says. “Advisors can use low-cost funds and help you structure your investments to be more tax-efficient,” both of which can bolster your retirement savings strategy.
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How to Save for Retirement in the Gig Economy originally appeared on usnews.com
