We are experiencing a major shift in the economy. Workers in the past were able to expect a steady job from a traditional employer over decades. Today, they are forced to either build a career out of a variety gigs or supplement their low salary with freelance work.
Even though you can earn a decent living in the gig economy (and perhaps even do so), this type of work leaves gig workers vulnerable on one important front: retirement planning.
Many gig workers do not save enough money for retirement without the support of an employer-sponsored account. According to a report released by Betterment, 7 out of 10 gig workers are not prepared to maintain their lifestyle in retirement. 3 out of 10 don’t set money aside for retirement.
What can a gig worker do if he or she doesn’t want a life of driving for Uber, and doing TaskRabbit work into their 70s or 80s? You can save money for retirement by working in the gig economy.
1. What do you own?
Most people have no idea how much they have. It’s difficult to plan for retirement without knowing where you stand today. To begin planning for retirement, you should first look at the money that is already in your account.
Calculate the amount of money in your bank accounts and retirement accounts. Also, add up any cash you have on hand, if you rely on tips for your gig. If you haven’t taken a recent look at your finances, the total may be higher than you think.
It’s important to understand your finances, even if all you have is pocket lint.
2. Open an IRA
Set up a retirement account as soon as possible if you do not already have one. If you do not have a retirement account, it is impossible to save money for your future.
Online, you can start an IRA. Designed for individual investors, IRAs offer a variety of investment options. You have more options if you are rolling over money from a 401k. Some IRAs require a minimum investment (usually $1,000). If you don’t have that much money to invest, you might want to consider a Roth IRA. These often do not have a minimum.
The taxation of the Roth IRA differs from the traditional IRA. You can fund a traditional IRA with income that has not been taxed. To put it another way, each dollar you deposit in an IRA does not count as income. IRA distributions will be subject to ordinary income tax once you reach retirement. Roth IRAs have been funded with funds that are already taxed. This allows you to take tax-free distributions in retirement.
Many gig workers opt for a Roth IRA due to their low tax burden. Roth IRAs can be a good investment for retirement if you expect to earn more in your career.
Whether you opt for a Roth IRA or a traditional IRA the annual contribution limit is $6,500 per person over 50 and $5,500 per person under 50.
3. Investment fees can be a real pain.
It’s important that gig workers choose asset allocations to minimize investment fees. While no investor would want to lose their portfolio growth due to fees, this is especially true for those who are self-employed. This is because gig workers have less money available to invest. Every dollar must work hard for them.
Index funds are a good way to ensure that investment fees do not drain the life from your retirement account. Index funds are mutual fund that mimic specific market indexes, such as the S&P 500. Index funds do not charge a management fee because there isn’t a portfolio manager choosing the investments. See also Start Investing with $100.
4. Embrace automation
The fact that you can’t plan to contribute the same amount every month is one of the biggest challenges for gig workers. Here’s where technology can help.
Set up an automatic transfer for a certain amount that you won’t miss. Whether it’s $50 per week, $5 per month or more, a small amount quietly transferring into your IRA will give you a cushion you won’t even notice.
From there, you can use to automate your retirement savings. Digit, for example, will analyze the inflows and outflows of your checking account and determine an amount you can safely save without risking an overdraft. It will then automatically transfer that amount to a savings account. The Digit savings can be transferred to your retirement account.
5. Invest found money
You can maximize your contributions by changing your perspective on “found money.” If you get a birthday gift from your grandmother, put half in your retirement and the other half into your savings account. If you get a tax refund, you should send half to your retirement account.
Gig workers who receive a lot of cash can set their own rules for how they use it. You could, for example, decide that each $5 bill must be put into your retirement savings. This will change the way you view money and help you increase your retirement savings.
