Ah, the gig lifestyle. You have freedom, independence, and a flexible schedule to boot. If only you could add a workplace retirement savings plan to that mix, life would be nearly perfect.
According to a poll conducted for Small Business Majority, four in 10 self-employed workers aren't actively saving for retirement. Some 38% of these solo entrepreneurs said they're not saving because they don't make enough. And another 31% admitted to not saving because of unpredictable income.
Saving is hard, particularly when you don't have access to a plan that takes pre-tax money right out of your regular paycheck. But if you plan on retiring at some point, you need to do the work of saving. Here's how self-employed folks and gig workers can get it done.
1. Set your expectations on retirement timing
The timing and length of your retirement dictate how much you'll ultimately need to save. Your gig may not be physically demanding, which might have you thinking you can work forever. But health issues can get in the way of that plan. It's always better to plan conservatively because you don't know how long you can work, or even how long you'll live.
According to the Social Security Administration (SSA), the average life expectancy of a 65-year-old man is 84. A 65-year-old woman can expect to live until she's 86.5. But the SSA also estimates that one in three 65-year-olds today will live past 90 and one in seven will live past 95. If you live a healthy lifestyle, you should prepare for the 95-year plan.
You can do that by tucking away savings now and watching them grow over time. If you end up working past the traditional retirement age, great -- that'll maximize your savings. Say you can manage to set aside $200 monthly and invest it to earn an average of 7%. In 10 years, you'll have about $35,000. In 20 years, you'll have about $105,000. And in 30 years, your balance will be $245,000. See how that works? The more time you have, the easier it is to amass larger sums of money.
Granted, those numbers aren't going to fund a champagne-and-caviar retirement. But having that nest egg gives you more flexibility to cut back on your working hours much sooner than if you hadn't saved at all.
If you have a target date in mind for partial or full retirement, use an online savings calculator to run the numbers. Assume you're setting aside as much as you can each month, and see how the balance grows over time. What you'll find is that you're always better off starting your retirement savings today -- even if it feels like your budget will be tight.
2. Choose a tax-advantaged plan
If you save for retirement in a tax-advantaged plan like a traditional IRA, Roth IRA, or Solo 401(k), your investments grow tax-free. And the impact of that can be significant. If you save in an account that doesn't allow for tax-free earnings, you'll owe taxes each year on any cash dividends and realized profits.
In return for the tax perks, there are limitations on how much you can contribute and when you can withdraw the money. As a general rule of thumb, you should consider your retirement savings off-limits until you reach age 59 1/2. Otherwise, you could face tax penalties for early withdrawals.
To choose which type of tax-advantaged retirement account is right for you, think about your tax situation today and how it might change in the future. Most of your retirement account options give you a tax break in the current year for your contributions. You then pay income taxes when you withdraw the funds during retirement. If you expect to be in a lower tax bracket in retirement, this works to your advantage.
The exception is the Roth IRA. You do not get a tax break in the current year for contributing to a Roth IRA. Since you make Roth IRA contributions with after-tax dollars, your qualified withdrawals in retirement are tax-free. This option is appealing if you expect to be in a higher tax bracket when you retire.
There is one caveat to know about Roth IRAs, however. Contributions are subject to maximum income limits, which start at $122,000 for those with single filing status in 2019.
A second factor to consider when choosing a tax-advantaged retirement account is how much you want to contribute.
- Traditional IRA contributions in 2019 are capped at $6,000, or $7,000 if you're aged 50 or older.
- Assuming you're under the income limits, Roth IRAs allow for annual contributions in 2019 of $6,000, or $7,000 if you're aged 50 or older.
- Solo 401(k) plans have more complex contribution rules, but the maximum allowed contribution is $56,000, or $62,000 if you're 50 or older.
- SEP-IRAs allow for contributions of up to $56,000 annually. There is no extra contribution, called a catch-up contribution, available if you are 50 or older.
A traditional IRA is the most straightforward option, while the Solo 401(k) allows for the highest amount of tax-deductible contributions if you are 50 or older. The SEP-IRA is a popular choice among gig workers, but not an ideal option if you plan on hiring employees to join your business in the future. This is because the SEP-IRA contribution percentage must be the same for everyone in the plan. If you have employees, that rule may prevent you from contributing high percentages to your own account.
You also could start with an IRA and roll it into a Solo 401(k) later, when times are good and you're able to make higher contributions.
3. Check-in on your Social Security benefits
If you've worked for 10 years or more, you've likely qualified to receive Social Security benefits. You can confirm your eligibility and benefit amount by creating a my Social Security account. Once you verify your identity and log in, you can see your estimated benefit amount at your full retirement age (FRA). You can also view your estimated benefits if you retire early at 62 or late at 70.
Your FRA is between ages 66 and 67, but the exact age depends on the year you were born. It's important to know your FRA because waiting until then to claim your Social Security benefits gives you some additional perks. For one, your retirement benefit is higher. And secondly, you can continue to work while receiving your benefits. If you claim Social Security before reaching your FRA and you're still working, you're at risk of losing some of your benefits.
Knowing your Social Security benefit estimate and FRA helps you firm up your plans around how much you need to save and how long you plan to work.
4. Save early and often
Now is the time to kick off your retirement savings plan. Open up that tax-advantaged account and set up automatic monthly contributions for as much as you can afford -- up to the maximum contribution limits. If you love your flexible gig-work lifestyle, you might just love the no-work lifestyle of retirement even more.