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Thursday, July 25, 2024

5 ways gig economy workers can save for retirement

We are in the midst of a major economic shift. While workers in the past could expect to maintain a stable job with a traditional employer for decades, today’s workers have discovered that they must either build a career through a variety of gigs or supplement a meager salary from a traditional job by doing freelance work. in their free time.

While you can make a living (and possibly even a good one) in the gig economy, this type of work makes gig workers vulnerable in one very important way: retirement planning.

Without the support of an employer-sponsored retirement account, many gig workers don’t save enough for their golden years. According to a recent report from Betterment, seven out of ten full-time gig workers say they are unprepared to maintain their current lifestyle during retirement, while three in 10 say they are not regularly putting money aside for retirement.

So what’s a gig worker to do if they don’t want to drive for Uber and take TaskRabbit jobs in their 70s or 80s? Here are five things you can do to save for retirement as a member of the gig economy.

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 other financial accounts. The total could be more than you realize if you haven’t checked where you are recently.

Even if you really have nothing more than spending money and a few quarters to your name, it’s better to know where you are than to move forward without a clear picture of your financial reality.

2. Open an IRA

If you don’t already have a retirement account to contribute to, you should set one up as soon as possible. If you don’t have an account into which you can deposit money, you won’t be able to save for your retirement.

IRAs are made specifically for individual investors and you can easily get started 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 get one Roth IRA as these often have no minimums.

The difference between the Traditional IRA and the Roth IRA is the way taxes are charged. A traditional IRA allows you to fund the account with pre-tax income. In other words, every dollar you put into an IRA is a dollar you don’t have to claim as income. However, you will have to pay ordinary income taxes on your IRA distributions once you retire. Roth IRAs are funded with money that has already been taxed, allowing you to take tax-free distributions in retirement.

Many gig workers choose a Roth IRA because their current tax burden is low. If you expect to earn more over the course of your career, using a Roth IRA for retirement investments can protect you from the tax authorities in retirement.

Whether you choose a Roth or a traditional IRA, the annual contribution limit as of 2018 is $5,500 for workers under 50, and $6,500 for anyone 50+.

3. Avoid the bite of investment fees

While no investor wants to lose portfolio growth to fees, it is especially important for gig workers to choose asset allocations that keep investment costs to a minimum. That’s because gig workers likely have less money to invest, so every dollar has to work hard for them.

Investing in index funds is a good way to ensure that investment costs don’t suck the life out of your retirement account. Index funds are mutual funds constructed to mimic a specific market index, such as the S&P 500. Because there is no portfolio manager choosing investments, there are no management fees for index funds.

4. Embrace automation

One of the most difficult challenges of being a handyman is the fact that your income is variable, which makes it very difficult to contribute the same amount every month. This is where technology comes into the picture.

To get started, set up an automatic transfer of an amount of money you won’t miss. Whether you can spare $50 a week or $5 a month, quietly moving a small amount of money into your IRA will give you a little cushion that you don’t have to think about.

Consider from there use a savings app arrange pension savings for you. For example, Digit analyzes the inflow and outflow of your checking account, determines an amount that you can safely save without being overdrawn, and automatically moves that amount to a savings account. You can then transfer your Digit savings to your pension account.

5. Invest found money

A great way to ensure you get the most out of your contributions each year is to change how you view “found money.” For example, if you receive a birthday check from your grandmother, spend only half of it and put the rest in your retirement account. Likewise, if you receive a tax refund (which is slightly less likely if you’re a handyman who pays estimated taxes quarterly), you can 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 money they receive. For example, you may decide that every €5 note you receive should go towards your retirement savings. That will help you change your view of money and give you a way to do that increase your retirement savings.

Frequently Asked Questions – FAQs

How can gig workers assess their current financial situation?

Start by totaling your checking and savings accounts, including any neglected retirement funds from previous jobs.

What’s the difference between a Traditional IRA and a Roth IRA?

Traditional IRAs use pre-tax income, while Roth IRAs use already taxed money, providing tax-free distributions in retirement.

How can gig workers avoid excessive investment fees?

Opt for index funds that replicate market indexes, eliminating portfolio manager fees.

What’s the annual contribution limit for IRAs?

As of 2018, $5,500 for workers under 50, and $6,500 for those 50 and older.

How can gig workers embrace automation for retirement savings?

Set up automatic transfers to IRA accounts and consider using savings apps like Digit for seamless contributions.

What’s a practical strategy for investing “found money” for retirement?

Allocate a portion of unexpected funds, such as birthday checks or tax refunds, to boost retirement savings.

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