Working independently, on your own schedule, for Uber or another “gig” job can be a great source of supplemental income. But one key difference between this work and a traditional job is the retirement savings options. While 52 percent of employees have access to an employer-sponsored retirement plan, just 16 percent of independent workers do, according to recent research by Prudential.
Part of the appeal of the gig economy is that you don’t have to work 40 hours every week. You often can control your schedule and work around other priorities like children or lifestyle. But this flexibility leads to less income each year from gig jobs. Since there is less money coming in, often none of it gets saved for retirement.
And since a gig worker works for themselves they have to create their own retirement savings plan. If you work for a company, the company has likely set up a retirement plan and it’s often easy to sign up for an automatic savings plan that takes money from each paycheck.
“With someone in a contingent worker’s role, you have to make all of these decisions yourself,” David John, co-director of The Retirement Security Project at Brookings Institution and an advisor with the AARP Public Policy Institute, told CNBC last month. “We know that when people don’t have choices they’re completely comfortable with and understand, they tend to put off that decision.”
Creative retirement planning
For many independent workers, the saving and investing process may be new. Many experience a mental challenge that makes it hard to take this process on by yourself. If you don’t know the process, it can be easy do delay getting started.
Two prominent gig employers, Lyft and Uber, are trying to help. Lyft has an arrangement with Honest Dollar, an online investing platform and Uber has a similar arrangement with a similar company called Betterment. In both cases, the companies make it easier for their drivers to automatically save.
How to save for retirement in the gig economy
Online savings platforms are great, but they are no substitute for good advice from a seasoned professional. With that in mind, here is a little advice for every gig worker:
- Since you will likely make less than full-time money, look carefully at your expenses. Work out a budget of things you need and what they cost. Prioritize your gig income to cover the important things first.
- Fund a cash emergency account. A pile of cash is cheap insurance against the next surprising expense. Life is filled with unexpected bills. Whether it’s your daughter’s trip to the emergency room for three stitches or the fender bender in the car, life always comes up with something new. An emergency fund at the bank is free, it’s safe, and you can get at it in less than an hour in most cases. Most experts agree that your emergency fund should cover about six months of bills. If your income is more seasonal, or varies, you should have more like 12 months of bills saved.
- After budgeting and saving, the next step is putting money away for retirement. In the beginning, work to fill up a Roth IRA for yourself. If you are less than 50, you are allowed $5,500 each year in IRA deposits. Next, fill one for your spouse. Roth IRA money does not give you a tax break today, but when you spend it in retirement it is 100 percent tax free. If you can save more than that:
- Consider a SEP IRA. It’s easy since there is very simple paperwork. You can decide to save at the end of the year after you figure out your taxes. You can save as much as $55,000 each year or 25 percent of your compensation, whichever is less. All contributions to the SEP IRA are tax deductible as a business compensation expense.
- Look at a Solo 401(k). There is a bit more paperwork with a solo 401(k), but it’s still easy. An advantage of a 401(k) is that you can still contribute as much as $55,000 each year and deduct it as an expense, but sometimes you can save more of your total earnings each year. Here’s how the 401(k) rules help:
- As the only employee of Your Business Inc. you can defer up to 100 percent of your compensation, as much as $18,500 for those less than 50, and claim it as a business expense.
- Your company can match your contribution with 4 percent of your earnings as a company match, which is another deduction.
- The company can also add a profit sharing contribution of up to 25 percent of profits for the year.
So, yes, you can fund your retirement with Uber. Depending on your situation, it might make sense to talk with a financial planner who works as your advocate – a fiduciary advisor – and one who works exclusively for you – a fee-only advisor. An experienced advisor will help you clarify priorities, set goals and make an action plan to move toward your financial goals.
Yes, I’m a fee-only, fiduciary advisor. And, yes, I’m still taking on a few great clients.
If you want to talk about your circumstances, contact my office at firstname.lastname@example.org. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.