Independence and the flexibility to choose when and where you work are some of the things that appeal to people the most about the gig economy, and are reasons why that mode of employment has risen in prominence in recent years, but here's the catch: being your own boss entails taking extra responsibility for your business approach, your finances and your retirement savings. Are you up for that?
This article will give you tips for taking care of those responsibilities while you work in the gig economy.
What is the gig economy?
The gig economy is a bit of a slippery thing to define. In large part that's because it's so diverse.
From house cleaners to journalists to computer programmers, there are well-established segments of the economy that have worked on an independent, freelance basis for decades. However, the prominence of this kind of working relationship has risen considerably with the emergence of online platforms like Uber or Airbnb that match consumers with service providers.
Not only are the types of jobs that make up the gig economy diverse, but the role this work plays in people's careers varies. A Federal Reserve study found that 31 percent of workers surveyed reported that they recently did some form of gig work. However, while a large portion of the workforce may be participating in the gig economy, most of them do so as a supplement to other forms of employment.
A Federal Reserve study found that just 16 percent of gig economy workers use it as their primary source of income. A separate study by the JPMorgan Chase Institute found the average monthly income from people using online platforms to find gigs was just $828. These figures suggest there is a world of difference between just dipping your toe in the water of the gig economy and diving into it as a career.
For those who are counting on gig economy work to be their primary source of income, it's especially important to take a financial approach that accounts for the often variable nature of this type of work.
Keys to thriving in the gig economy
Here are some basic tactics for surviving - or even thriving - in the gig economy:
- Diversify your job sources. Having work coming from multiple sources can help smooth out the peaks and valleys that often come with gig work. It also reduces the risk of having all your income depend on one source.
- Shop for health insurance. Lack of benefits is one of the foremost drawbacks of gig work. Health insurance is especially important because if you are injured or too ill to work, you won't be able to make money to pay your medical bills. With regulations on health insurance being loosened in some states, shop carefully to make sure you get a policy that will cover you when you need it most.
- Maintain an emergency fund. This is a savings account with enough money to cover three to six months worth of basic expenses. Anyone may need to tap into an emergency fund from time to time, but they are an especially important safety net for people in the gig economy who may be subject to gaps in income.
- Look after your own retirement saving. Without access to an employer-sponsored retirement plan, you have a greater responsibility to look past your short-term financial needs and start setting aside money for retirement. This will be discussed in greater detail in the next section.
Traditional and Roth IRAs and the gig economy
Since working in the gig economy is likely to mean you won't have access to an employer-sponsored retirement plan, the responsibility of saving for retirement falls squarely on your shoulders. For most people working independently without a corporate structure this means making good use of an Individual Retirement Arrangement (IRA).
Here are four tips for making good use of an IRA in the gig economy:
- Know the distinction between traditional and Roth IRAs. Traditional IRAs allow you to defer taxes on contributions until you retire, while Roth IRAs require you to pay taxes upfront in exchange for receiving tax-free distributions upon retirement. That means the choice comes down to whether you expect to be in a higher tax bracket after retirement than you are in now.
- Set targets based on IRA contribution limits. How much should you contribute to your IRA? The general IRA contribution limit for 2019 is $6,000. This represents something of a disadvantage for gig economy workers, since contribution limits on employer-sponsored plans are generally much higher. To make the best of this situation, make it a goal to put the maximum $6,000 into your IRA each year.
- Use windfalls to bolster contributions. People with regular paychecks fund their retirement plans by deferring a set amount from each check. This may not be feasible in the feast-or-famine world of gig economy pay. Given that you could have trouble making IRA contributions during lean times, make sure you make up for it when you have more profitable periods.
- Make use of catch-up contributions if you are aged 50 or older. IRA contributions limits for 2019 include an extra $1,000 contribution available to people aged 50 or over. In particular, if you've taken on gig economy work as an alternative to full retirement, supplementing your retirement savings in this way may prove very valuable.
One of the appeals of the gig economy is that it offers you the opportunity to be your own boss. That means you have to step up to the responsibility of acting like an employer when it comes to mapping out your business strategy and planning for retirement.