We are in the midst of a major economic shift. While workers in the past could expect to keep a stable job with a traditional employer for decades, workers of today have found they must either cobble together a career from a variety of gigs, or supplement a lackluster salary from a traditional job by doing freelance work in their spare time.
Though you can make a living (and possibly even a good one) in the gig economy, this kind of work does leave gig workers vulnerable in one very important way: retirement planning.
Without the backing of an employer-sponsored retirement account, many gig workers are not saving enough for their golden years. According to a recent report by Betterment, seven out of 10 full-time gig workers say they are unprepared to maintain their current lifestyle during retirement, while three out of 10 say they don’t regularly set aside any money for retirement.
So what’s a gig worker to do if they don’t want to be driving for Uber and taking TaskRabbit jobs into their 70s and 80s? Here are five things you can do to save for retirement as a member of the gig economy.
1. Take stock of what you have
Many people don’t have a clear idea of how much money they have. And it’s impossible to plan your retirement if you don’t know where you are today. So any retirement savings should start with a look at what you already have in the accounts in your name.
Add up how much is in your checking and savings accounts, any neglected retirement accounts you may have picked up from previous traditional jobs, cash on hand if your gig work relies on cash tips, or any other financial accounts. The sum total could add up to more than you realize if you haven’t recently taken stock of where you are.
Even if you truly have nothing more than pocket lint and a couple quarters to your name, it’s better to know where you are than proceed without a clear picture of your financial reality.
2. Open an IRA
If you don’t already have a retirement account that you can contribute to, then you need to set one up ASAP. You can’t save for retirement if you don’t have an account to put money in.
IRAs are specifically created for individual investors and you can easily get started with one online. If you have money from a 401(k) to roll over, you have more options available to you, as some IRAs have a minimum investment amount (typically $1,000). If you have less than that to open your account, you may want to choose a Roth IRA, since those often have no minimums.
The difference between the traditional IRA and the Roth IRA is how taxes are levied. With a traditional IRA, you can fund the account with pre-tax income. In other words, every dollar you put in an IRA is a dollar you do not have to claim as income. However, you will have to pay ordinary income tax on your IRA distributions once you reach retirement. Roth IRAs are funded with money that has already been taxed, so you can take distributions tax-free in retirement.
Many gig workers choose a Roth IRA because their current tax burden is low. If you anticipate earning more over the course of your career, using a Roth IRA for retirement investments can protect you from the taxman in retirement.
Whether you choose a Roth or a traditional IRA, the contribution limit per year, as of 2018, is $5,500 for workers under 50, and $6,500 for anyone who is 50+.
3. Avoid the bite of investment fees
While no investor wants to lose portfolio growth to fees, it’s especially important for gig workers to choose asset allocations that will minimize investment fees. That’s because gig workers are likely to have less money to invest, so every dollar needs to be working hard for them.
Investing in index funds is one good way to make sure investment fees don’t suck the life out of your retirement account. Index funds are mutual funds that are constructed to mimic a specific market index, like the S&P 500. Since there is no portfolio manager who is choosing investments, there is no management fee for index funds.
4. Embrace automation
One of the toughest challenges of being a gig worker is the fact that your income is variable — which makes it very difficult to plan on contributing the same amount each month. This is where technology comes in.
To start, set up an automatic transfer of an amount of money you will not miss. Whether you can spare $50 per week or $5 per month, having a small amount of money quietly moving into your IRA gives you a little cushion that you don’t have to think about.
From there, consider using a savings app to handle retirement savings for you. For instance, Digit will analyze your checking account’s inflow and outflow, and will determine an amount that is safe to save without triggering an overdraft, and automatically move that amount into a savings account. You can then transfer your Digit savings into your retirement account.
5. Invest found money
An excellent way to make sure you’re maxing out your contributions each year is to change your view of “found money.” For instance, if you receive a birthday check from your grandmother, only spend half of it and put the rest in your retirement account. Similarly, if you receive a tax refund (which is a little less likely if you’re a gig worker paying quarterly estimated taxes), send at least half of the refund toward your retirement.
Any gig workers who often receive cash can also make their own rules about the cash they receive. For instance, you could decide that every $5 bill you get has to go into retirement savings. That will help you change your view of the money and give you a way to boost your retirement savings.
4 unexpected sources of retirement income
Retirement is expensive and becoming more so all the time. Meanwhile, fewer jobs are offering pensions to help cover retirement costs, and some are even canceling 401(k) matching temporarily due to the strain this latest recession places on their finances. Some workers are also struggling to set aside money for their futures right now, and that can amplify concerns about financial security in retirement.
If your low 401(k) balance triggers anxiety every time you look at it, I have good news. You may be able to count on income from some unexpected sources in retirement to help you cover the difference between what you’ve saved on your own and what you need. Here are three you should look into.
1. Health savings account
You’re probably familiar with health savings accounts (HSAs) if you have a high-deductible health insurance plan — one with a deductible of at least $1,400 for an individual or $2,800 for a family. Money you put into this account reduces your taxable income this year, and if you use the money for medical expenses, you won’t owe any taxes on it at all. What most people don’t realize is that it’s also a great place to stash your retirement savings.
Normally, you can withdraw money for non-medical expenses, but you’ll pay taxes on it plus a 20% penalty. But once you turn 65, this penalty goes away and your HSA becomes similar to a traditional IRA, with two key differences. The money is still tax-free if you use it for medical expenses, and you don’t have to take required minimum distributions (RMDs) from your HSA once you turn 72, so you can leave the money in your HSA as long as you’d like.
Only those with high-deductible health insurance plans may contribute to an HSA. In 2020, individuals may set aside up to $3,550 in an HSA and families may set aside up to $7,100. Adults 55 and older may add another $1,000 to these limits. Some HSA providers enable you to invest your funds, and this can help your savings grow more quickly.
Consider stashing some of your extra cash here if you want to save for your future but are worried about locking up all of your funds where you can’t access them without penalty. You can still call upon your HSA to help you in a medical emergency, but if this doesn’t happen, the money will just help you be more prepared for your retirement.
2. Side hustle
Working a side hustle in retirement may not feel like retirement to some people, but there are so many different ways to earn extra cash these days and many don’t require much effort. Those with extra properties can rent them out to long-term renters or to travelers just passing through the area. It’s also possible to rent out your parking space or vehicle these days if you don’t use them that often.
If you’re creative, you could try selling your own photography or artwork, writing and self-publishing books, or doing small commissioned pieces for family and friends. Or you could share your expertise on any topic that interests you by blogging, creating an online course, or teaching local classes.
Think about what interests you the most and how you might turn your talents into money-making opportunities. The best part about a side hustle is that you can decide how much or how little you’d like to do and how much you want to charge, so you have a lot of say in how much you make from your side hustle.
You can’t forget about taxes, though. Side hustles usually don’t come with regular paychecks, but you still owe the government its cut. Set up a separate savings account where you can keep your tax funds so you don’t accidentally spend them. If you’ve had your side hustle in previous years, your latest tax return should tell you how much you need to pay in quarterly, or you can use this form to estimate what you’ll owe. Don’t forget about state income tax as well.
3. Social Security
Some of you may think Social Security doesn’t belong on this list, but there are still people who are under the impression that Social Security is going to disappear shortly and won’t be around for them when they retire. Fortunately, that’s not true. If you’ve worked at least 10 years, you will most likely qualify for some sort of Social Security benefit, though it might be a smaller benefit than you’d hoped for.
The latest Social Security Trustees Report indicated that Social Security’s trust funds would be depleted by 2035 if the government made no changes to the program. The COVID-19 pandemic and subsequent recession could accelerate this deadline, but in either case, Social Security won’t disappear. The Trustees Report predicts that Social Security could still pay out 76% of scheduled benefits until 2090.
The government could also make changes to the program going forward to help keep it sustainable for generations to come. Proposed ideas include raising the full retirement age, raising the Social Security tax rate, cutting benefits, and reducing cost-of-living adjustments (COLAs). Some of these solutions could result in Social Security covering less in the future, but it’s not going away any time soon.
You will always need substantial personal retirement savings to cover your living expenses, but you may be able to count on money from some of these other sources as well. Consider opening an HSA if you’re eligible for one and think about which, if any, side hustles would interest you in retirement. You should also make sure you work for at least 10 years, and preferably longer, so you’re eligible for Social Security when you’re older.
4. STOCK TRADING
RETIREMENT INVESTORS looking to boost income have an opportunity that probably doesn’t come to mind right away – trading in the options market with strategies like writing covered calls.
It sounds like blasphemy. After all, the standard advice is to play it pretty safe in retirement accounts like IRAs, and options would seem to violate all that. For every winning options bet, someone loses – likely the player with less experience. Most options contracts expire worthless, and since they have a fixed expiration date you can’t just wait for things to turn around like with stocks and bonds.
But don’t write off options in IRAs too soon. After all, many small investors have more money in their retirement accounts than in taxable accounts, so if options appeal to them, the IRAs are where the money is.
“Yes, you can trade options in IRAs,” says Mike Scanlin, CEO of Born To Sell, an online service for covered-call traders. “Covered calls are by far the most common strategy.”
Scanlin’s customers are typically between 40 and 70 and try to use covered calls to earn 1 to 2 percent a month on the securities involved, he says.
“Covered calls can also be a great way to get a little extra yield from an asset that might be declining but that you feel confident holding on to for the longer term,” says Russ Robertson, owner of ATI Wealth Partners in Atlanta.
“It’s not very common for individual investors to trade options within an IRA,” Robertson says, though he trades options for his clients’ retirement accounts. “Most investors take a long-term view of IRA assets, a view which we support, and don’t actively trade [in their IRAs]. Options inside an IRA are best suited to a disciplined, active investor that can monitor positions regularly.”
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