saving for retirement

5 Ways Gig Economy Workers Can Save for Retirement

Emily Guy Birken — Mon, 16 Nov 2020 22:12:58 +0000

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. (See also: 15 Lucrative Side Hustles for City Dwellers)

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. (See also: These 13 Numbers Are Crucial to Understanding Your Finances)

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. (See also: How to Start Investing With Just $100)

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.

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How the Sandwich Generation Can Protect Their Retirement

Emily Guy Birken — Fri, 09 Oct 2020 17:32:44 +0000

For those who are caring for their aging parents and raising kids at the same time, it can often seem like there's never enough time, money, or energy to provide for all the family members who need you. In particular, handling finances when two different generations are relying on you can feel like an impossible balancing act — not to mention an exercise in feeling guilty no matter what you do.

But being the caregiver sandwiched between two generations makes it even more important for you to prioritize your own financial needs, especially when it comes to retirement planning. By protecting your retirement during this difficult season of your life, you'll be in a better place to remain independent as you age, launch your kids into a more secure adulthood, and offer ongoing support to your parents.

Sound impossible? It's not. Here's how you can protect your retirement if you're a member of the sandwich generation.

Retirement savings comes first

Retirement savings should get priority ahead of putting money into your kids' college funds. You know that already. Your kids can take on loans for college, but there are no loans available to pay for your retirement.

The more difficult decision is prioritizing retirement savings ahead of paying for long-term care for your parents. That can feel like a heartless choice, but it is a necessary one to keep from passing money problems from one generation to the next. Forgoing your retirement savings during your 40s and 50s means you'll miss out on long-term growth and the benefits of compound interest. By making sure that you continue to set aside money for retirement, you can make sure your kids won't feel financially squeezed as you get older.

Instead of personally bankrolling your parents' care, use their assets for as long as they last. That will not only allow you to make the best use of programs like Medicaid (which requires long-term care recipients to have exhausted their own assets before it kicks in), but it will also protect your future.

Communication is key

Part of the stress of being in the sandwich generation is feeling like the financial burdens of two generations (as well as your own) are resting entirely on your shoulders. You feel like you'll be letting down the vulnerable people you love if you can't do it all. But the truth is that you can't do it all. And you shouldn't expect that of yourself, nor should your family expect it of you. So communicating with your loved ones about what they can expect can help you draw important boundaries around what you're able to offer them.

This conversation will be somewhat simpler with your children. You can let them know what kind of financial help they can expect from you for college and beyond, and simply leave it at that.

The conversation is a little tougher with your parents, in part because you need to ask them about nitty-gritty details about their finances. Whether or not money is a taboo subject in your family, it can be tough for your parents to let you in on important financial conversations — to them it feels like they were changing your diapers only a few short years ago.

Being in the loop on what your parents have saved, where it is, what plans they have for the future, and who they trust as their financial adviser, will help protect their money and yours. You'll be better able to make decisions for them in case of an emergency, and being included in financial decisions means you can help protect them from scams. (See also: 5 Money Strategies for the Sandwich Generation)

Insurance is a necessity

Having adequate disability insurance in place is an important fail-safe for any worker, but it's especially important for those who are caring for aging parents and young children. The Council for Disability Awareness reports that nearly one in four workers will be out of work for at least a year because of a disabling condition. With parents and children counting on your income, even a short-term disability could spell disaster, and force you to dip into your retirement savings to keep things going. Making sure you have sufficient disability income insurance coverage can help make sure you protect your family and your retirement if you become disabled.

Life insurance is another area where you don't want to skimp. With two generations counting on you, it's important to have enough life insurance to make sure your family will be okay if something happens to you. This is true even if you're a full-time unpaid caregiver for either your parents or your children, since your family will need to pay for the care you provide even if they aren't counting on your income.

It's also a good idea to talk to your parents about life insurance for them, if they're able to qualify. For aging parents who know they will draw down their assets for long-term care, a life insurance policy can be a savvy way to ensure they leave some kind of inheritance. If your parents are anxious about their ability to leave an inheritance, a life insurance policy can help to relieve that money stress and potentially make it emotionally easier for them to draw down their own assets.

Become a Social Security and Medicare expert

Spending time reading up on Social Security, Medicare, and other programs can help you to make better financial decisions for your parents and yourself. There are a number of misconceptions, myths, and misunderstandings masquerading as facts about these programs, and knowing exactly what your parents (and eventually you) will be entitled to can help make sure you don't leave money on the table or make decisions based on bad information.

The eligibility questionnaires at benefits.gov can help you determine what benefits are available and whether your parents qualify. In addition, it's a good idea to sign up for a my Social Security account for yourself. This site will provide you with personalized estimates of future benefits based on your lifetime earnings, which can better help you prepare for your own retirement.

Don't be afraid to ask for help

Caring for children and parents at the same time is exhausting. Don't compound the problem by thinking you have to make financial decisions all by yourself. Consider interviewing and hiring a financial adviser to help you make sense of the tough choices. He or she can help you figure out the best way to preserve your assets, help your parents enjoy their twilight years with dignity, and plan for your children's future.

Even if a traditional financial adviser isn't in the cards for you, don't forget that you can ask for help among your extended family and network of friends. There's no need to pretend that juggling it all is easy. Family can potentially offer financial or caregiving support. Knowledgeable friends can steer you toward the best resources to help you make decisions. Relying on your network means you're less likely to burn out and make disordered financial decisions. (See also: 9 Simple Acts of Self-Care for the Sandwich Generation)

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Trading Work for Never-Ending Weekends: How to Retire Early

Tara Struyk — Tue, 20 Mar 2012 10:00:20 +0000

I’m a long way from retirement, but I’ve definitely had those days. You know the ones I mean — when you’re tired and irritable, when it’s cold and gray and windy, when everything feels like more of the same old thing, when you haven’t had time to do your laundry let alone spend time with your friends, and, on top of it all, the thought of grinding out a few more decades at the office seems utterly insurmountable.

If you hear the word “retirement” on a day like that, it probably sounds a lot more like “emancipation” (I know it does for me). After all, if you didn’t have to work, you could spend more time with your family and your friends, catch up on your golf game, take up new hobbies, travel the world...

Hold on a minute. If you’re slipping away into sweet reverie, you might need a reality check. Here it goes. Retiring early is no dream — it’s a goal, and an ambitious one at that. That isn’t to say you can’t or shouldn’t go for it. But unless you strike it rich in the lottery, succeeding at retiring early will mean careful planning, hard work, and near-superhuman self discipline. Here’s what you’ll have to do to make it happen. (See also: Deciding What You Want Out of Retirement)

Save — a Lot

You probably already know that experts recommend that you save a lot for retirement. Exactly how much is a matter of debate. It’s also highly personal, as it depends on your lifestyle, what you want to do during retirement, and (everyone’s least-favorite calculation) how long you think you’ll live. This is where things get tricky in terms of retiring early. In essence, working for a shorter period of time puts you at a disadvantage on both ends of the saving equation: you’ll have fewer earning years, and more years during which you’ll have to rely on your savings.

So how much might you need to save? Rather than start with someone who makes six figures, let’s look at averages. The medium income in the U.S. is $50,000. Average life expectancy is almost 78 years. If you are 35 and would like to retire at 60 with 80% of your pre-retirement income, you will need to save about $1 million — and that’s assuming you get the estimated Social Security payment. You can check out the retirement calculator I used to figure this out, but no matter how you fiddle with the numbers, retiring early will add up to a big one.

Live Cheap

Saving enough to retire early will mean living on less than you make, and you’d better get used to it; your Spartan lifestyle will become even more crucial when you stop working. When you’re working eight (or more) hours a day, a wide-open schedule can seem like a dream come true. But there’s another financial benefit to working that you may not have thought of — being stuck at work all day leaves you with much less time to spend money.

So what about when you’re retired and have nothing but time? Can you keep yourself occupied and keep your spending in check? This can be a real challenge, especially when expensive hobbies and travel are part of your plans. This is why having a lot of savings and using careful planning are so important. A good financial planner can help you with this, but when you don’t have earning power, you need a good cushion to ensure your money lasts. After all, the last thing you need is to run up against the end of your savings when you’re too old to go back to work.

Stick to the Plan

Because retiring early is a challenge, it’s important to have a clear plan for how you’re going to get there. Exactly how early do want to retire? How much will you need to save to make that possible? These are questions you need to answer to ensure you’re on the right track to making your goal a reality. A financial planner can help you run the numbers. Then it’s up to you to keep that plan on track. The numbers make it sound easier than it really is, at least for most of us. Living on less can be tough — especially when everyone around you is spending like there’s no tomorrow.

Find a Source of Passive Income

If you’re not familiar with the term passive income, you’re missing out on one of the sweetest deals in the investing world. In essence, passive income is income that’s generated without your labor. In other words, you don’t have to work for it — or at least not as hard as you have to work for most of the other income you’ll earn in your life. Investments such as dividend stocks and real estate, or royalties generated from something you’ve created such as a website or book, are considered passive income. Once a source of passive income is up and running, all that’s left for you to do is accept the check in the mail.

Rethink “Retired”

A member of my family retired in his 60s, but was soon back to working part-time. Why had he chosen to go back to the grind?

“You can only play so much golf,” he told me. As an energetic, healthy, and active guy, he just wasn’t happy without some real work to do. He has flexible, part-time work that he enjoys, and he’s still home in time to have lunch with his wife.

Retiring at 65 used to mean a handful of years of retirement. Now, it can mean 20 or more. So, while you may relish a lazy Sunday now, those long, uneventful days may not have the same appeal when they become an everyday reality. If you’re hoping to retire early, consider including work in the picture. It’ll make it easier to afford the things you enjoy. Plus, the time you spend working might even make that extra leisure time more enjoyable.

Understand the Risks

Retiring early isn’t easy. It does have its rewards, but it isn’t without risk. Medical or other unexpected expenses can dry up your savings too soon; you may not enjoy a life of leisure as much as you’d hoped, and, not least of all, the financial and personal sacrifices you have to make to retire early can have a cost, too. If it’s really a different kind of life you want, you might want to ask yourself whether you can start living it now, perhaps by pursuing more of the things you love, or finding a job that you can be happy going to for a few more years. No matter what you choose, just be sure to avoid jumping at a dream. Those coveted post-work years can be sweet, but don’t kid yourself — it’ll take a lot of hard work to get there.

Are you working toward punching out early? Or have you successfully made the leap to early retirement? I'd love to hear about how you made it happen!

This article is from Tara Struyk of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Tell if You're on Track for Retirement

Silicon Valley Blogger — Fri, 04 Sep 2009 18:00:02 +0000

It may be a little bit early to think about retirement all too seriously if you still have several decades left before you face it. But don't look now -- time flies and before you know it, there won't be much time to prepare for retirement. On this subject, the big question I have in mind is this: how do we know if we've saved enough for our retirement years?

In order to maintain the lifestyle that we are used to, the conventional wisdom tells us that we need to be subsisting on an income equivalent to 75% to 90% of what we currently make prior to retirement. This is a natural assumption because we don't expect to have the same amount of expenses in our older age as we do when we are growing our families. Of course, it would be another story altogether if you expect to live it up in a big way once you've retired.

While retirement is a long time goal, it would still serve us well to plan for it while we're still young and healthy. I've been saving for retirement ever since I started earning an income because I realize that with long term investing, time is of the essence. As the saying goes "Timing the market is not what's important. It's time IN the market." Simply put, investing early and as regularly as you can makes a huge difference in how large your nest egg will be in your old age.

So let's answer the question: how much savings do we need to retire? Here are a couple of ways to calculate the answer:

Solution 1: Use online retirement planners and calculators.

You'll find these free tools available in a variety of sites, such as standalone investment sites, mutual fund sites such as T.Rowe Price and Vanguard, or even at discount brokers (the likes of which I've reviewed: you can check out my reviews of Scottrade and TradeKing). They offer great ways to help you plan for retirement which are based on several assumptions such as:

Your current age
The age you intend to retire
How long you expect to live
Your current income
Your cash flow during retirement
The size of your retirement savings
How much you expect to contribute to savings
Expenditures during retirement
Risk level of your investment portfolio
Historical return rates of your portfolio

I would suggest trying out these calculators to give yourself some idea of where you stand with regards to your retirement savings. For my retirement planning, I've visited Scottrade to try out their tools. These tools can help us figure out the cost of waiting (which tells us what happens to our accumulated savings based on when we start investing), how much to save and how long our retirement savings can last, and how to choose between a traditional IRA and a Roth IRA. Knowing these facts is a great way to start developing your retirement plan -- and as you can see, it's easy enough to do on your own.

Solution 2: Try a quick and easy retirement savings formula.

I would also suggest using the following simple formula for determining exactly how much it is you should have saved by the time you retire. Just crank out your numbers manually as follows:

1. Know how much income you'd like to have during retirement.

2. Peg down an annual withdrawal rate that you're comfortable with. How much of your retirement savings do you plan to withdraw each year? In order to keep your nest egg intact, the recommendation is for you to withdraw between 4% to 6% of your savings on an annual basis.

3. Make these calculations.

To find out how much savings you need to support yourself during your retirement, try this formula:

Your annual income during retirement divided by the annual withdrawal rate should equal your desired savings.

As an example, let's say you are making $80,000 a year right now. If you expect to live on 80% of your current income during your retirement, then designate this to be $64,000. If you determine your withdrawal rate to be 4%, then your nest egg by the time you retire should be:

$64,000 / .04 = $1,600,00

Take note that the result here is but a rough estimate. Of course, if you plan to work through retirement, then such a savings amount should be adjusted accordingly. The formula is simplistic but it helps give you a basic idea of what you need to do.

One of the best ways to save up for your later years is to maximize your contributions to tax-advantaged retirement accounts. Better yet, contribute the maximum to your retirement plans and take advantage of employer contributions to your program as well. All this is pretty well known advice that seems simple enough to do, but surprisingly, a lot of people tend to procrastinate on this matter. Remember that the better prepared you are, the more likely you'll be able to enjoy your golden years without financial worry.

This article is from Silicon Valley Blogger of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: