Gig workers face retirement challenges
The composition of the American workforce is changing. The old “40 years and a gold watch” is now a historical artifact (likely some readers do not even apprehend the reference). Fewer workers today are full-time permanent employees, moving instead from job to job under temporary contracts. These so-called “gig” workers (a term used by itinerant musicians) may enjoy more freedom and flexibility that can conceivably enhance their overall quality of life. But contingent workers also face challenges in saving for retirement and obtaining health security previously provided through more traditional employment arrangements. As this trend accelerates, it is critical that workers in non-traditional arrangements focus intently on saving and investing for the future.
While the term is au courant, the concept of the gig economy is old. Contingent workers include freelancers, independent contractors and other non-permanent workers hired on a per-project basis. Estimates place the share of the U.S. labor force engaged in such non-permanent employment at 30 percent, or about 50 million people. And most labor experts expect the percentage to increase steadily, as employers embrace the flexibility and cost efficiency of engaging contracted employees where possible. Gig workers are expected to comprise 40 percent of the workforce by the end of the decade. And they are not saving enough.
A Harris online poll conducted last spring on behalf of Prudential Financial highlighted the hurdles these contingent workers face in pursuing financial security. This survey adds to the growing body of evidence suggesting that participants in the gig economy are not doing enough to provide for the future, and that more attention must be paid by workers, advisers and policymakers to head off a looming financial shortfall.
One important finding was that gig workers earn less: about $26,000 less per year on average than regular full-time employees. This owes largely to a shorter average work week, 25 hours versus 40 for traditional jobs. Add to this the somewhat surprising result that giggers tend to be four years older than full-timers on average, and the savings challenge becomes more acute.
Furthermore, contracted workers lack access to employer-sponsored retirement plans typically available to traditional workers. That means not only the unavailability of a tax-deferred saving option but also the absence of any potential matching employer contributions. The survey found that only 16 percent of gig workers had any assets in an employer-sponsored or self-employed retirement plan.
What to do? The accelerating movement toward gig employment requires that participants take additional actions to replace the tools formerly offered through conventional employers.
A number of tax-favored retirement plans are available at little or no cost to self-employed individuals. SEP (Simplified Employer Pension) plans provide for significant annual employer-only contributions (up to $54,000) to an IRA account with no annual forms or returns to file. This type of savings plan can be effective if giggers have established a recognized business structure like a corporation or LLC. Contributions are tax-deductible to the business entity and tax-deferred for the participant. SEP plans require that all employees receive equal percentages of compensation, but are especially effective for sole proprietors that have established a business structure.
Other potential options include solo 401(k) and SIMPLE plans, as well as traditional deductible IRAs and non-deductible Roth IRA accounts. Each has advantages and limitations, and a competent adviser, accountant or financial planner can help you sort it all out.
But every attractive alternative is only as beneficial as the commitment to consistently feed it. It has never been more important to commit to disciplined, dedicated saving and investing than in the new and growing gig economy. And the clock is ticking.
Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co. in Chattanooga.