There are many upsides to the gig economy and freelance work, like the flexible schedule, the autonomy of being your own boss, and, if it’s a side hustle, the ability to earn extra income to pay off bills or save for special purchases. But a path to a stable retirement does not appear to be among the benefits, at least for a lot of gig economy workers.
Betterment, an online investment platform, has just released new research focused on the finances and the future of retirement in today’s self-employed workforce. And it’s not all good news.
Their report looks at the nation’s dated retirement system, and how it has left gig economy workers unprepared. The study notes that the rise of the gig economy is fundamentally changing the way Americans earn, spend, and save for retirement, pointing out that the freedom and flexibility of the gig economy is nice now, but, for many, unsustainable over the long term.
Two categories of gig economy workers are covered in the report: full-time giggers, who rely on independent work or temporary contracts as their main source of income, and side-hustlers, who supplement a traditional full-time job with an independent or temporary gig.
“While employees with a traditional nine-to-five are getting gig economy jobs to make up for gaps in their retirement savings, full-time giggers are unprepared for their financial future,” states the report, which revealed that seven in 10 full-time gig workers feel they will not be able to maintain their current lifestyle during retirement.
What’s more, three in 10 people who earn their main income through the gig economy set aside no money for retirement regularly.
With a significant number of people engaged in the gig economy, these are not statistics to take lightly.
As of May 2017, there were 10.6 million independent contractors in America, according to the Bureau of Labor Statistics. However, the BLS number doesn’t take into account side jobs picked up for extra money; it only includes those who use gig economy or contract work as their primary source of income. Upwork estimates the gig economy is much larger, with as many as 57.3 million people.
With these numbers in mind, Betterment suggests there are several levers gig economy workers can pull to become more financially prepared for their future.
Make Better Use of Technology
Whether driving for a ride-sharing platform or selling products online, gig workers tend to be a tech-savvy group by nature. But there appears to be a major disconnect when it comes to using apps and web services to earn money – and tapping technology to maximize their financial security in retirement, says Betterment.
Gig economy workers, it seems, do not turn to technology for savings or investing with the same frequency as they do for finding jobs.
According to the Betterment study, while 59% of gig workers use a digital platform for their jobs, only 19% use an automated savings tool or app to save money, while 42% store money at home.
Gig economy workers need to embrace technology as a tool for work today as well as retirement tomorrow, states the report.
So what exactly does that mean?
“One of the main things you can do is make savings easy through auto deposits,” said Nick Holeman, a CFP with Betterment.
If you struggle to put money aside for retirement, begin by automatically transferring a small amount of money each month into a savings account. Pick an amount you likely won’t even miss, no matter how small, and over time, that money will grow. And then when you’re able, slowly begin to increase the amount you’re contributing.
Digit, for instance, analyzes your the deposit and withdrawal patterns in your bank accounts and, every few days, picks an amount to transfer to savings that you’re unlikely to miss. Qapital lets you create savings rules to reward or punish behavior — for example, you can set it up to transfer $5 to savings every time you step into a Starbucks, or a dollar per mile you walk or run.
Yet another important way technology can help is through digital investing, including automated financial advising platforms and tools. Online investing is radically changing the dynamics of retirement preparation, says Holeman, making it far easier for the average individual to open an investment account.
“The minimum amount you need to invest in order to get started has been cut dramatically. You no longer need $10,000 to open an account… because robo-advisors are so much more efficient,” explained Holeman. “These companies don’t need an army of human beings. So, from a business standpoint, they can afford to serve customers with lower minimum deposits.”
And one last note: Gig workers may not have access to an employer provided life insurance plan. But there are online companies that help with this as well, such as Policy Genius, which offers both life and disability insurance.
Open an IRA
Traditional, full-time jobs typically come with the advantage of 401(k) or 403(b) plans and matching contributions from the employer, says Holeman. Gig economy workers however, can’t count on such benefits.
But Holeman says there are ways to replicate at least part of the retirement benefits that full-time workers receive.
“Open an IRA,” he says. “Sure you might not have the match, which is a downside. But on the upside, you have so much more control over where you open the account and which funds you choose. Typically, employer plans are not very transparent and come with high fees. And you don’t get to pick which funds you invest in. So you’re at the mercy of your employer.”
In other words, think of it as an opportunity to be the master of your own retirement program. Whether you want the immediate tax perks of a traditional IRA or the tax-free retirement withdrawals of a Roth IRA, search for an IRA with low fees and attractive investing options.
- Related: Roth vs. Traditional IRA
Retire Later and Revise Your Definition of Retirement
There has been much written about the significant financial benefit associated with retiring just a few years later. Rather than leaving the workforce at 65 or 66, or taking early retirement at 62, consider working until 67 or longer.
There’s a variety of reasons why this can make a big difference to your bottom line in retirement. Chief among them is a dramatic reduction in Social Security benefits if you take them before full retirement age, which is gradually rising to 67 due to legislation passed by Congress.
But waiting for full Social Security benefits isn’t the only factor. A few extra years in the workforce means fewer years tapping your retirement savings, taking some of the pressure off your nest egg.
Holeman also suggests revising your idea of retirement. The image of one sailing off into the sunset at 65 and never working another day may be increasingly unrealistic. That’s not only because it’s financially untenable, but also because some retirees get bored and want to remain connected with people and their community by continuing to work at least part-time during retirement, Holeman explained.
“So many of us are behind for whatever reason. The main takeaway for me is that there are many ways to get back on track for retirement, such as retiring later, or shirking the traditional idea of retiring at 65 and never working again,” said Holeman.