How to Create a Gig Worker Retirement Plan

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If you’re a gig worker, do you ever worry about retiring? The gig economy is growing, and so are the number of gig workers. It now encompasses 34% of the U.S. workforce, and is projected to rise to 43% by 2020. This takes in freelancers, contract workers, temporary workers, and probably even the self-employed. If you’re in this group, how do you create a gig worker retirement plan?

That’s a tough question, and we’re going to tackle it here.

Everyone hopes to retire someday, yes, even gig workers. But the path to retirement is admittedly less certain for gig workers.

How can you maintain the gig worker lifestyle, and still hope to retire one day?

How to Create a Gig Worker Retirement Plan
How to Create a Gig Worker Retirement Plan

The Challenges of Creating a Gig Worker Retirement Plan

Part of the difficulty in giving advice in this area is that gig work includes so many variables. It lacks the predictability so important in retirement planning.

Here are some of those major variables:

Variable income level. A salaried worker may earn $5,000 per month, every month, all year long. A gig worker may earn $5,000 one month, $2,000 the next, and $8,000 the month after that. If he or she is successful, an equivalent salary of $60,000 will be earned over the course of the year – equal to a full-time salary. But the month-to-month variations can wreak havoc with cash flow. That can make it impossible to get onto a steady savings process.

Uneven employment. A gig worker may work three months on an assignment, be unemployed for two months, then take another gig for five months. Once again, the lack of income stability can make saving money difficult.

Lack of employee benefits. The ace in the hole for salaried workers saving for retirement is an employer-sponsored retirement plan. Gig workers seldom have that available.

A “getting through the moment” mindset. Some enter the gig economy willingly. But for many others, it’s seen as a transitional state. That may be true – you may only be doing gig work until a full-time, permanent situation comes up. But sometimes that plan doesn’t play out. As often as not, you work in the gig economy assuming it will be temporary. But as the months turn into years, it starts to become more permanent.

If you view it as permanent from the start, you’ll have the right mindset to begin saving for retirement. But if you see it is only temporary, you might put off saving until a “someday” that never arrives.

Each of these is common among gig workers.

How to Find Money for Retirement Savings

“Find” is the operative word. If you’re on a regular salary, saving for retirement is mostly about carving out some space in a stable budget. For gig workers, the budget can be anything but stable. You literally have to find the money to contribute to a retirement plan.

Since there are so many different ways gig workers earn a living, loose suggestions have to substitute for hard and fast strategies.

Save When Your Income is Higher

There are two ways to accomplish this:

Save a percentage of your income when it’s flowing steadily. Many gig workers experience times of the year when income is higher than normal (or at least higher than average for the year). These will be the best times to allocate money for retirement. Other times of the year, your income may be too low to contribute anything.

Save a higher percentage when you’re on a lucrative gig. If you’re on a particularly well-paying gig, you should take advantage of the fact and plow as much in retirement as possible.

For either of the above two strategies, it might help to develop a budget based on your average income for the past 12 months. You’ll have to learn to live strictly on that budget. But if you can, you can begin saving money for retirement when your income exceeds the budget, and pull back when it doesn’t.

Create Multiple Income Streams and Dedicate One to Retirement Savings

As a freelance blog writer, I don’t know if I officially qualify as a gig worker. But my business is made up of gigs with a large number of steady clients. My blog also generates a fairly steady income. As a result of having these multiple income sources, I’ve been able to create a fairly consistent monthly income. That’s an optimal situation for anyone who works in the gig economy.

But if you’re unable to get that kind of flow with your gig work, it might be worth it to work on getting one gig – a fairly steady one – that you use to fund your retirement savings. I suggested this strategy with health insurance as well.

If you’re a gig worker, you’re basically self-employed. And when you’re self-employed, you must often engage in a game of matching income streams with major expenses. Dedicating an income source to retirement savings is an example.

Develop a Semi-retirement Gig

As a gig worker, you have to face the reality that full retirement may not be in your future. The up-and-down nature of gig work often leaves little room in your finances to build a comfortable retirement. But one workaround is to prepare for a life of semi-retirement instead. That can involve preparing to rely on a combination of Social Security income, regular withdrawals from whatever savings you do manage to accumulate, and some sort of semi-retirement gig.

If you’ve been doing gig work much of your career, particularly late in life, it’s actually a natural evolution. You simply choose one gig that you can do for the rest of your life. The best way to do that is to either identify or create a gig based on sustainable work. That’s the kind of work that you are naturally suited to do, and that you will be able to continue into old age.

If you’re doing gig work, it’s likely you’re experienced in multiple occupations. Choose the one that works best for you, or use it as a base that you can modify, and turn it into sustainable work. You can do it on a part-time basis to supplement whatever retirement income you have. It won’t be the same as full retirement, but it will be the next best thing.

And if your gig worker, you’re probably quite familiar with the whole concept of making financial compromises.

Retirement Savings Plans for Gig Workers

So far we’ve been talking about the challenges of creating a gig worker retirement plan, as well as some options to generate funding. But what retirement plans can you save in as a gig worker?

Answer: the same ones as just about everyone else!

Traditional IRA. You can contribute up to $5,500 per year, or $6,500 if you’re 50 or older. The contributions are tax-deductible, and your investment earnings accumulate on a tax-deferred basis. You can set it up as a completely self-directed plan, and choose and manage your own investments. Withdrawals can begin at age 59 ½, and will be subject to ordinary income tax.

Roth IRA. Roth IRAs work much like traditional IRAs, but with a couple of important distinctions. The contribution limits are the same, but they’re not tax-deductible. However, because they’re not, distributions taken from the plan are tax-free if taken after age 59 ½, and as long as you participate in the plan for at least five years. Meanwhile, investment earnings do accumulate on a tax-deferred basis.

What’s more, the IRS allows you to withdraw your contributions at any time, without being subject to tax or penalty. That can be an important quality for a gig worker, who may need to access the account early.

Retirement Plans with Higher Contribution Amounts for Higher Incomes

SIMPLE IRA. SIMPLE IRAs are much like traditional IRAs, except the contribution limits are much higher. For 2018, you can contribute up to $12,500, or $15,500 if you’re 50 or older. The contributions are fully tax-deductible, and you can contribute up to 100% of your income up to the contribution limits. In all other respects, they work like traditional IRAs.

SEP IRA. The SEP IRA is a better option for higher income gig workers. You can contribute up to 25% of your net income, to a maximum of $55,000 per year for 2018. Contributions are tax-deductible, and you can choose the account trustee and the investments you make.

Solo 401(k). Solo 401(k) plans are 401(k) plans for self-employed people who have no employees. You can qualify for a plan with just about any type of non-employment income, including contract and freelance work. Dollar for dollar, it allows higher plan contributions than just about any other plan.

Similar to an employer-sponsored 401(k), you can contribute up to $18,500 per year as an employee, or $24,500 if you’re 50 or older. But since you’re also your own “employer”, you can also make an employer contribution. That can be up to 25% of your compensation.

As a simplified example, let’s say you make $50,000 in gig income. You can contribute $18,500 as an employee, plus $12,500 as an employer (25% of $50,000). That will give you a total contribution of $31,000, which is 62% of your income.

If you have a particularly strong income year, the solo 401(k) can be a way to fast-forward your retirement savings.

Non-retirement Savings and Investments

Formal retirement plans are not the only way to save money for retirement. And it may be that as a gig worker it’ll be tough to participate in a plan that’s any more complicated than a traditional or Roth IRA. But there are couple of other ways to accumulate retirement savings as a gig worker.

Non-retirement savings is just a matter of saving and investing money in non-tax-sheltered investments. This can include bank investments, mutual funds, brokerage accounts, and robo-advisors. Of course, there’s no tax deduction for contributions, and investment earnings will be taxable in the years earned.

But taxable accounts do have a couple of advantages for gig workers. For one, you can take money out at any time, without worrying about tax consequences. Second, when you begin withdrawing money in retirement, there will similarly be no tax consequences. If you have income from Social Security and a sustainable gig, having access to tax-free funds will be a major advantage.

Buy a House and Pay it Off Before Retirement

In a day and time when owning a house is largely seen as a consumer luxury, its potential as a retirement asset is often overlooked. But you have to live somewhere, and if you own a house, it could represent a future retirement nest egg.

Of course, as a gig worker it could be difficult to qualify for a mortgage to purchase a house. But if you can, it can be a solid retirement strategy.

Buy the house, pay off the mortgage in 30 years or less, and you’ll have two retirement options:

  1. Continue living in the house after it’s paid, and you’ll be mortgage-free (though you’ll still have to pay property taxes, insurance, and all the other common homeowner expenses). The strategy will work even better if the house has two or more units, and can generate rental income.
  2. Sell the house, and use the proceeds as a retirement nest egg. The IRS even provides an exemption on some or all of the gain on sale. If you’re single, the first $250,000 in gain is tax-exempt. If you’re married, it rises to $500,000.

Of course, both housing strategies require that you pay your mortgage off. If you instead use it as an ATM machine, neither strategy will work.

Final Thoughts on How to Create a Gig Worker Retirement Plan

If it looks like a gig worker retirement plan is a less-than-perfect venture, it’s probably because it is. As normal and common as gig work has become, it’s generally not the best situation to prepare for retirement.

If you’re gig worker, and you’re worried about retirement, you can take at least some comfort in the fact that retirement is becoming a more difficult prospect across-the-board. The rising cost of living (particularly healthcare), in combination with lingering doubts over Social Security, is making full retirement a bigger hurdle for all but the wealthiest of Americans.

But that doesn’t mean you should ever give up. If you’re gig worker, you’ve become accustomed to being resilient and doing things a bit different. That mindset can actually serve you well in retirement. But some retirement planning will be necessary. Whatever you can save is better than nothing. You may not be able to build up a retirement savings plan with $500,000 or $1 million. But $50,000 or $100,000 may serve as a superior emergency fund, in combination with Social Security, and a continuing gig in retirement.

Retirement is certainly more complicated for gig workers. But at the same time, it’s far from impossible. It may not be the full time, living-at-the-beach version, but it can be an easier life than the one you have right now. And that’s probably the main purpose of retirement in the first place.

If you’re gig worker, what are you doing the plan for your retirement years?

( Photo by BhaduriAbhijit )

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4 Responses to How to Create a Gig Worker Retirement Plan

  1. What a great article and great info! Saving for retirement is a challenge for me and I appreciate your suggestions. Will be forwarding this to other self-employed/gig working friends and family. So many people struggle with how to save with inconsistent income. I’ve definitely had to think outside the box and come up with my own retirement plan. Every time I hear new tips, I end up fine-tuning it, and it helps a lot.

  2. Hi Jae – From what I’ve seen there’s more people working in the gig economy or self-employed than ever, and the number seems to be growing. We have to come up with workable strategies to prepare for the long-term in what has become an inherently short-term employment universe. But I think it’s mostly an adjustment. It’s certainly not as easy as working in a salaried job with a formal pension plan, but there are workarounds. I think we all need to share “secrets” frequently because it is complicated.

  3. Gig works is most certainly in almost everyone’s future, except the lucky few with no jiggles in steady employment or health. This analysis of funding retirement through different work strategies plus relevant savings options is truly unique.

    You certainly have me thinking about both dedicating streams of income to savings and upping my contribution to my Solo 401(k).

    Bravo Kevin for providing the first real comprehensive blueprint for what will likely become the norm in the future.

  4. Thanks Ian, one of my goals is to break new ground, but with the internet that’s a tall order. I’m thinking I want to focus this blog on gig workers, self-employment and semi-retirement. And maybe alternative investing. They all seem to be related. Maybe the name of the site should be Out of the Box, cuz that’s really how we need to be thinking. The real world for real people is much different than the happy universe of lifetime employment with a generous 401k, complete with employer match, and secure early retirement that the mainstream likes to portray.

    BTW, I think the trend will only accelerate in the next recession. Employers now view employees as liabilities/expenses, and they’ll cut in droves at the first sign of bad news.

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