The “gig economy” may sound hip, but it’s really made up of those who are self employed and work as independent contractors.
It’s a group of individuals whose numbers grew by 15% in the past decade, according the Christine Benz, Morningstar’s director of personal finance.
In 2019 — the year before the COVID-19 knocked the Earth off its axis — 16% of workers at U.S. businesses were independent contractors (or gig workers).
As Benz writes in a recent column, Retirement Planning for the ‘Gig’ Economy, the world changed with the pandemic. When was the last time you took an Uber or Lyft?
Well, those drivers are part of the gig economy, and many have likely lost jobs, or at least some income, due to the immediate drop in business. That said, other areas ramped up for these workers, since food, grocery and package delivery firms all needed more independent contractors.
Advisors with gig economy clients, Benz says, can actually guide them in saving for retirement. It’s a worthy goal, especially given the fact that a Pew Research report recently stated that only 13% of self-employed workers save for retirement.
Here are five steps advisors should urge gig workers to take for their retirement savings, despite the ebb and flow of working for oneself.
1. Insurance is still a must.
Benz agrees this isn’t really a retirement savings plan. However, it’s best to make sure that an independent contractor has health insurance to prevent financial hardships.
“If a self-employed person is forced to turn to unattractive forms of financing, such as credit cards to defray near-term income needs, the cost of that financing is likely to swamp the long-term returns on any money earmarked for retirement,” she writes.
That includes the danger of raiding retirement assets like Individual Retirement Accounts, too.
She points out that gig workers who have qualifying high-deductible healthcare plans also can contribute to health-savings accounts to defray out-of-pocket costs. Better yet, these accounts are tax deductible and can be used in retirement.
2. Build up emergency reserves.
While this may be easier said than done — especially these days, Benz says having a liquid emergency fund takes precedent over setting aside money for retirement.