5 Retirement Savings Strategies for Gig Economy Workers

We are witnessing a significant shift in the job market. Unlike previous generations who could rely on steady, long-term employment with a single employer, today’s workers often find themselves navigating a landscape comprised of multiple gigs or augmenting a meager salary from traditional jobs through side hustles.

While it is possible to earn a decent living in the gig economy, these workers face a critical challenge: planning for retirement.

Without access to employer-sponsored retirement plans, many gig workers struggle to set aside adequate savings for their later years. A report from Betterment highlights that 70% of full-time gig workers feel unprepared to maintain their lifestyle in retirement, and 30% do not regularly save any funds for this purpose.

What can gig workers do to avoid working Uber or TaskRabbit shifts well into their senior years? Here are five strategies to help you effectively save for retirement as part of the gig economy. (Also, check out: 15 Profitable Side Hustles for Urban Residents)

1. Assess Your Current Financial Situation

It’s essential to have a clear understanding of your financial standing. Without knowing your current financial position, it becomes challenging to plan effectively for retirement. Therefore, your first step should be to review all your financial accounts.

Calculate your total assets, including checking and savings accounts, any neglected retirement accounts from past employment, cash on hand, or tips accumulated through gig work. The overall amount may surprise you if it’s been a while since your last financial appraisal.

Even if your total assets sum up to a small amount, it’s better to have a clear picture of your finances than to operate in uncertainty. (See also: These 13 Figures Are Essential for Your Financial Understanding)

2. Establish an IRA

If you haven’t opened a retirement account yet, it’s time to do so. Retirement savings can’t begin without a designated account.

IRAs (Individual Retirement Accounts) are tailored for individual investors and can be conveniently set up online. If you’re looking to roll over funds from a 401(k), you may have additional options since some IRAs require a minimum investment (usually around $1,000). If you don’t have that much, consider a Roth IRA, which often has no minimum contribution.

The primary difference between a traditional IRA and a Roth IRA lies in how taxes are applied. With a traditional IRA, contributions are made using pre-tax income, meaning that dollars invested do not count as taxable income. However, you will pay income tax on distributions when you retire. In contrast, Roth IRAs are funded with money that’s already been taxed, allowing for tax-free withdrawals in retirement.

Many gig workers opt for a Roth IRA because their current tax rates are low. If you anticipate higher earnings in the future, a Roth IRA could save you money on taxes in retirement.

Regardless of whether you choose a Roth or traditional IRA, the annual contribution limits (as of 2018) are $5,500 for those under 50 and $6,500 for individuals aged 50 and above.

3. Keep Investment Fees Low

All investors want to avoid losing potential gains to fees, but it’s particularly crucial for gig workers to select investment options that minimize costs. Given that gig workers typically have a smaller amount to invest, ensuring that every dollar goes to work for them is vital.

Investing in index funds is an effective strategy to avoid high fees associated with many actively managed funds. Index funds track specific market indices, like the S&P 500, and do not require a management fee due to the absence of a portfolio manager. (Also see: How to Start Investing With Just $100)

4. Automate Your Savings

One of the biggest hurdles for gig workers is income variability, which complicates consistent monthly contributions. That’s where automation can play a key role.

Start by setting up an automated transfer of a manageable amount from your checking account to your retirement savings. Whether you can set aside $50 each week or $5 a month, this small, automatic deposit can help you build a safety net without needing to think about it.

Additionally, consider using savings applications like Digit. These tools can analyze your account balance and spending habits to determine a safe amount to save without triggering overdrafts, automatically transferring that amount to your savings. You can then move your Digit savings into your retirement account.

5. Allocate Windfalls Wisely

A great way to ensure you are maximizing your retirement contributions is to adopt a new perspective on “found money.” For example, if you receive a birthday check, consider splitting it—spend half and direct the remainder to your retirement savings. The same goes for a tax refund; while it may be less frequent for gig workers paying quarterly taxes, try to allocate at least half of any refund to your retirement.

If you often receive cash through your gig work, set personal rules for how to manage it. For instance, you could designate that every $5 bill you receive goes directly into your retirement fund. This approach can help you rethink your cash flow and enhance your retirement savings.