As many as 50% of Americans have some sort of side gig, whether this is primarily how they make money, or in addition to a regular job.

The gig economy, a phenomenon that may have emerged as a response to the high unemployment rates of the 2008-2009 recession, has become a part of American life, and it’s reshaping retirement.

While these gigs offer workers more flexibility and variety, they may also come with some downsides, affecting how financially set people are for retirement.

Some Are Missing Out on Retirement Plans

According to Christopher Stroup, a Certified Financial Planner (CFP) with Abacus Wealth Partners, being your own boss has its perks, but unfortunately, having a built-in retirement plan, like a 401(k), isn’t one of them.

“Gig workers must understand that saving for their retirement falls squarely on their shoulders,” he said.

“These workers are often both the employer and employee at the same time, which means it’s critically important to understand the savings options available to you that will give yourself the best chance of a financially secure future.”

Other Workers Are Opening Their Own Retirement Plans

Pensions expert at SIPP Advice, a retirement planning firm, Sam Hodgson said, “it’s still possible to save into a pension in the US without having a 401(k) — you just need to know how to do it and be proactive.”

He added, “The problem is that most people don’t know how, especially younger generations, and these are the people who are more likely to be working in the gig economy.”

Younger people should not wait until later to begin retirement planning. Stroup explained that there are four retirement plans for self-employed folks to look into: Traditional and Roth IRAs, SIMPLE and SEP IRAs, Solo 401(k)s and Health Savings Accounts (HSA).

Read More: The 5 Things That Disappear When You Retire

Self-Employed Retirement Plans Still Offer Tax Relief

Hodgson urged anyone working in the gig economy, especially younger people, to open an IRA or other retirement plan as soon as they are able.

“What’s so great about retirement accounts is the tax-relief: you can effectively deduct your IRA contributions from your taxable income, so you pay less income tax,” said Hodgson. “Not only can you invest your saved money, but you can then invest more from the tax relief you get back.”

Even someone making very little can invest that money in an IRA, Hodgson explained.

“It might seem small, but if you’re earning more, the tax relief will be more. And over 40 years of working and being invested in the stock market, this can create a small fortune for your retirement years.”

Irregular Income

Another way the gig economy is affecting retirement is that these workers often have irregular income, said Josh Michaels, CEO and founder of Money4Loans.

“This variability can make it challenging to commit to a consistent savings plan, which is crucial for building a retirement nest egg,” he said.

“Gig workers need to develop a more flexible approach to savings, adjusting their contributions based on their fluctuating income while ensuring they still set aside funds for the future.”

A Greater Need For Emergency Funds

Gig workers should also consider creating an emergency fund, Michaels advised. “Given the unpredictability of gig income, having a safety net is vital to avoid dipping into retirement savings during lean periods.”

Healthcare Costs Are a Concern

Healthcare is another important factor that plays a role at retirement, when older people are more likely to incur healthcare expenses, Michaels said. Gig workers may not even be thinking about this if they’re still in their younger, healthier years.

“Without employer-sponsored health benefits, gig workers must plan for healthcare costs in retirement, which can be substantial,” Michaels said.  “Exploring health savings accounts (HSAs) and factoring in Medicare are crucial steps in this planning process.”

Ultimately, Michaels said, “The gig economy demands a shift in retirement planning, emphasizing self-reliance and adaptability. It’s about creating a personalized plan that accommodates income variability and fills the gaps left by the absence of traditional employment benefits.”

Need for Self-employment Tax Planning

Sal Cocurullo, founder of Revenue Land, explained self-employed individuals may not realize they are responsible for paying both the employer and employee portions of social security and Medicare taxes.

“This means that they need to plan for these expenses and ensure that they are saving enough to cover them,” he said.

Importance of Diversification

The inconsistency of the gig economy underscores just how important it is for gig workers to come up with a diversified retirement plan.

Cocurullo said, “Since their income stream is unpredictable, it’s important to have a diversified portfolio that can weather any market fluctuations.”

Professional Advice Is More Important Than Ever

Since retirement planning can be complex in the best of scenarios, Cocurullo stressed that it’s always a good idea to consult with a financial advisor or planner to ensure that you’re making the best decisions for your situation.

He said, “They can help you create a customized retirement plan that takes into account your unique circumstances.”

Underscoring the Need for Financial Education

A critical component often missing for gig workers is financial education, according to Max Avery, a finance expert and a board member at Syndicately.

“Understanding investment principles, tax implications and how to efficiently save for retirement can empower gig workers to make informed decisions,” continued Avery. “Community programs, online resources and financial advisors can play a significant role in filling this knowledge gap.”

While the gig economy offers flexibility and independence, it also demands a more hands-on approach to retirement planning.

Avery said, “By understanding the challenges and employing strategic saving and investing tactics, gig workers can navigate these waters successfully. The key is education and a proactive mindset toward financial planning.”

 

 

 

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