According to NPR, the gig economy – which consists of freelancers, temps, contractors, and other independent, on-demand workers – can account for half of the American workforce within the decade. Hours are flexible, assignments are relatively short-term, and many workers have the luxury of working remotely.
The deal might seem too good to be true, and in some ways, it is. Because workers in the gig economy aren't part of a larger corporation, or often jump from gig to gig, they don't have access to traditional benefits – namely, retirement plans.
"The gig economy is just another step further removed from the three-legged stool, the traditional way of planning for retirement, which has become almost obsolete," said Jadon Newman, CEO of Noble Capital. "It makes the margin of error even smaller with fewer fallback vehicles like 401(k)s and pensions."
Retirement as we know it is changing, and though the gig economy is partially to blame, that doesn't mean the shift is a negative one. Here's everything you need to know about retirement in the gig economy and what you can do to better prepare yourself.
Impact on retirement
The gig economy impacts retirement in various ways. Here are three major effects:
Lack of financial stability
According to research by Prudential, only 16 percent of independent workers have a retirement savings plan, compared to 52 percent of their full-time counterparts.
"The trend in America is already a lack of savings and little planning," said Newman. "These factors taken together could spell disaster for those looking to retire."
An adequate level of financial stability is the main reason for retirement. Without a 401k or pension, workers will either struggle with expenses or simply won't be able to afford to retire at the desired time.
"While the term retirement used to imply rest, relaxation, and enjoyment, it now means stress, worry, and concern," said Newman. "We all will retire one day, but not all will retire with lifestyle, confidence, and fulfillment."
Because many gig workers don't have enough savings to support retirement, they're forced to continue working later in life. For many, retirement is now more of a transition from an occupation than a complete withdrawal.
However, this isn't necessarily bad news. Brie Reynolds, senior career specialist for FlexJobs, stated that many people prefer a "flexible transition" into retirement, which is an option that these gig-style jobs provide. Just because you can't fully retire doesn't mean you can't work a job that allows you four-hour workdays and three-day workweeks.
Today, thanks to the gig economy, more people pursue flexible careers that they enjoy. Retirement isn't a major concern for everyone because, with flexibility and career satisfaction, many gig workers don't view their jobs as taxing.
"Retirement expectations on the part of individual professionals are definitely changing," said Reynolds. According to a FlexJobs' survey, 70 percent of near-retirement professionals need to work to pay for basic necessities, but nearly 60 percent work because they enjoy it. That might mean retirement occurs much later in life for many individuals.
Retirement saving options
There are other plans, similar to a traditional 401(k), that help gig workers save for retirement. Here are three popular ones:
Open Multiple Employer Retirement Plan (Open MEP)
Open MEPs are employer-sponsored retirement savings plans. According to a statement by Troy Tisue, president of TAG Resources LLC, presented to The U.S. Senate Committee On Health, Education, Labor and Pensions, "The Open MEP leverages the joint resources of unrelated, small employers to provide retirement plan expertise (including professional fiduciary protections); access to institutional support; access to a wide range of unrelated, non-proprietary investment fund families; and institutional pricing of investments; none of which would be otherwise available to them – at virtually any cost."
Single-participant 401(k) plans
According to the IRS, one-participant 401(k) plans have the same rules and requirements of a traditional 401(k) but cover a business owner with no employees (except for a spouse).
In a statement to The U.S. Senate Committee On Health, Education, Labor and Pensions, Vikki Nunn, CPA and co-owner of Porter, Muirhead, Cornia & Howard, said that for most, a solo 401(k) is a great way for gig workers to meet retirement needs.
"It is particularly helpful since income may fluctuate a great deal from year to year," she stated. "With a solo(k), they can put more away in a high-earnings year and can end up funding more for retirement than their employer and personal contributions were providing before."
Simplified Employee Pension Plan (SEP Plan)
SEP plans allow self-employed workers to set aside money for themselves in retirement accounts. Additionally, they don't require startup or operating costs that conventional retirement plans typically do, and they allow up to 25 percent contribution of the worker's pay, according to the IRS.
Individual tips for retirement preparing
According to Newman, different economic times call for different financial approaches. In this case, it requires extra planning.
"If someone needs or wants to work during their retirement, they should start planning as early as possible to lay the groundwork for themselves," said Reynolds.
Reynolds provided questions to ask yourself when preparing for retirement:
- How much do you want or need to work, and how much do you want or need to make?
- Would you rather work on-site or remotely?
- What types of flexibility are important to you?
- Do you want to work in your current profession or in a new role?
- Is this an opportunity to "give back" through nonprofit work?
Depending on your answers, you can determine whether or not you're ready to retire – and how you'd like to go about it. Regardless, the earlier you start planning and setting aside money, the better off you'll be – both financially and emotionally.