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How to Plan for Retirement in a Gig Economy

How to Plan for Retirement in a Gig Economy

Being your own boss. Making your own schedule. Taking control of your career. Those perks and others—including not worrying about being downsized by your company—drive professionals into self-employment all the time. In fact, the gig economy keeps growing year after year.

How big is the gig? Pretty enormous. The month before the 2020 pandemic exploded, CNBC reported that independent contractors made up anywhere from 10% to a third of workers. Then, Covid hit, and though some freelancers lost their work, more joined into the fray of the gig economy in an attempt to recession-proof their jobs. Accordingly, Forbes estimates that the percentage of gig economy workers should head toward the 50% mark by 2023.

While the here-and-now perks of working for oneself are high, it does take intentionality to think about retirement and what that will look like.

The Retirement Years, Gig Economy Style

For gig workers, the thought of retirement is much different than an employee with a pension. Gig economy professionals only sometimes get help building their wealth. More often, they have to take a “we’ll do it ourselves” approach. That’s laudable but challenging. It can also leave them at a disadvantage if they fail to take their “Future Me” selves into consideration.

What’s the harm in waiting until later to start thinking about life after the average retirement age, which Yahoo! Finance pinpoints as around 64? The main problem is that it takes time to build a nest egg. Retirement savings aren’t like weeds that seem to bloom overnight. They’re more like trees that, once planted, take decades to grow. This means that the later a gig worker starts saving, the less time the money can blossom.

The alternative to having to work forever or live on meager savings during the latter years is to start planning for retirement early. Though the subject can seem daunting, squirreling away money for retirement doesn’t have to be difficult or head-scratching.

Even independent contractors who’ve never taken an accounting course in their lives can do something—anything—to get ahead. And as Ty J. Young Wealth Management notes, every dollar that’s stewarded now can multiply seven-fold over time. This is especially true for very young entrepreneurs in their 20s and 30s who are just setting out.

Investing for Retirement When You’re a Gig Economy Worker

The process of setting up a personalized retirement plan starts with understanding the many options available to professionals. Most people don’t realize how many opportunities they have to store and grow their wealth. The more they know, the more they can make smart choices with the income they make.

Below are several proven ways to stock up and save for retirement. Of course, each method varies in its risk, but all have been beneficial for countless other gig economy workers. And most of these methods can be deployed quickly to start the wealth-growing process faster.

1. Look into CDs.

Financial institutions, like banks and credit unions, frequently offer certificates of deposit or CDs. These vehicles can become low-risk, long-term parts of a more fleshed-out retirement portfolio. The way they work is simple: Give the financial institution money for a specified period of time. In exchange, the financial institution promises to pay back a certain amount of interest when the CD “matures.”

Easy enough, right? The only downside is that CD rates aren’t high. They’re normally well under the 1% mark. For instance, Bankrate puts the five-year CD average at 0.31% as of August 2021. That means $1,000 will “turn into” $1015.60 within a five-year period. Not stellar, but better than keeping the money locked away in a savings account.

CDs obviously aren’t good for raising money in the short term. However, when used as part of an overall lifetime wealth-boosting strategy, they can bump out anyone’s retirement-era finances. The trick is to allow the CDs to renew automatically unless the money is needed for an emergency. That way, the CD becomes a “set it and forget it” part of the background.

2. Set up a private IRA.

Many freelancers and independent contractors don’t realize that it’s possible to set up an IRA account without an employer. IRA accounts range in types, such as Roth IRAs and traditional IRAs. For example, most IRAs are tax-deferred with tax-free withdrawals. However, all IRAs have caps on how much a gig economy worker can contribute per year.

Setting up an IRA account doesn’t mean getting a financial advisor, either. Plenty of firms and financial institutions offer people the ability to choose an IRA online. However, workers should spend time getting to know the upsides and shortcomings of each IRA before making a decision. They should also be committed to putting money into their IRAs regularly if they can. Otherwise, the IRA won’t have a chance to evolve. With that being said, everyone has a rough year now and then. Accordingly, gig economy workers may vary on their annual IRA contributions, particularly when they’re just starting.

It’s worth noting that it can be possible to roll a 401k from a previous employer into an IRA. This may be an appropriate decision for someone who used to work for a company, but has moved into entrepreneurial circles.

3. Start a solo 401k.

A solo 401k allows gig workers to make contributions both as an employer and employee.

How much money can be socked away? The IRS has pretty clear guidelines when it comes to contributions for solo 401ks. Case in point: The annual contribution amount for a gig worker under the age of 50 stands at $19,500 a year. On the employer side, the IRS rules are a little trickier. So it might be worth it to work with a financial planner on a solo 401k setup, or at least get pro advice.

4. Research (and maybe invest in) stocks.

Before getting too far into this tip, it’s important to note that the stock market should never be used as the only retirement wealth management vehicle for anyone. Stocks can fluctuate wildly, although CNN notes that they’ve historically brought in 10% gains. (That’s pretty impressive, quite honestly.) Yet that’s only an average of all stocks over many decades. Apple stock soared at one point and has become coveted. On the other hand, RadioShack tanked years ago to the point that the company called its own stock worthless per CNBC.

In other words, the stock market is volatile. Nevertheless, a diversified stock portfolio can work for many people, especially independent contractors who are young. The younger the portfolio is set up, the longer it can work. A playbook on Generation Z investing from The New York Times explains that younger people are in a powerful position to get real traction with stocks. With youth on their side, they can afford to experiment in a way that someone close to 50 probably wouldn’t.

Really, stocks are a long-haul solution. In fact, they’re often used to augment a less risky retirement vehicle like a solo 401k or an IRA. Yet that doesn’t mean they should be put on the backburner. Anyone can invest in the stock market, not just the rich and famous.

Reaping Gold in the Golden Years

It’s so challenging to imagine life in 40, 50, or 60 years. Consider all the changes that have come in the past three decades. The rise of the Internet alone has transformed so many industries, right down to the way people communicate. It’s also been one of the reasons for the boom in gig economy work in general.

Yet, it’s important to look ahead occasionally, especially regarding personal money management habits and opportunities. Being a gig worker can be challenging on the pocketbook, especially at first. Setting aside tax dollars and figuring out a household budget takes time. Nevertheless, the idea of creating a safe haven for the future remains critical.

No matter how much the landscape changes in the coming years, people will still need money to survive. (It’s doubtful that people will move to other exchanges. Even a cashless society uses the principle of cash!) Consequently, the earlier gig workers begin to save up in a manner that beats inflation rates, the less stress they’ll have when they start to scale back. And that means they can breathe easier and dive into the gig economy with positivity and earnestness.

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Co-Founder at Hostt
Peter Daisyme is the co-founder of Palo Alto, California-based Hostt, specializing in helping businesses with hosting their website for free, for life. Previously he was the co-founder of Pixloo, a company that helped people sell their homes online, that was acquired in 2012.

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