Many associate the word “gig” with musicians jumping job-to-job, playing different venues every night. But the “gig economy” that gets discussed in the news today is different. It refers to a new segment of the service economy, including freelancers and independent contractors who take short-term or temporary positions. These positions are often flexible on where workers are located, allowing people to work remotely or on a self-defined schedule.
Unlike full-time, permanent employees, gig workers have less job security, but enjoy greater freedom in their work lifestyles. Employers of gig workers often save money by not paying benefits most full-time time workers would expect to receive. One of these is a retirement savings plan.
In this article, we’ll explore some of the challenges gig workers face when saving for retirement. Retirement planning is essential, so take the necessary steps to set up and invest in a retirement account, even if it seems daunting.
The New Gig Economy
Most sources point to the 1910s as the origin of the word “gig,” as it was used by jazz musicians to refer to temporary positions they could take at lounges or clubs to make ends meet. The new gig economy, though, is a more recent product of developments in the late 2000s.
The creation of services like Airbnb and Uber played a considerable role in the growth of the gig economy, as more people took on unconventional means of making money. Airbnb allowed people to profit by renting out spaces to vacationers year-round. Uber mobilized thousands of drivers to become independent contractors, losing the benefits and stability associated with traditional employment, but gaining control over their own work schedules.
Since then, ride-sharing services like Lyft and an increased number of remote workers (caused, in large part, by the pandemic) have caused “gigging” to become much more common.
The rise of the gig economy has had several impacts both on workers and employers. Many companies have been able to hire from a wider pool of talent since remote work and temporary positions are increasingly likely to attract applicants. Gig workers can enjoy more freedom, less oversight from a boss (since they don’t have one), and the ability to work from home.
However, a significant drawback to the gig economy is that many people lose out on company-sponsored retirement plans. In many traditional companies, having access to a retirement plan like a 401(k), with contribution matching or stock benefits, is the norm. And research has shown that the biggest obstacle to people saving for retirement is the initiative-hurdle people need to jump over to start the process.
Why Should Gig Workers Plan for Retirement?
If we’re lucky, we all eventually grow old. And the older we get, the fewer hours most want to work. Even if you’re the kind of person who prefers to stay busy and thinks they’ll want to perform well past 60, eventually, you’ll have to slow down.
In 2023, the average monthly Social Security benefit for retired workers was $1,825. Accounting for the pressures of rent, utilities, groceries, and other, random discretionary purchases, most people recognize this is not enough money to comfortably live on. Most elderly people get only 30% of their income from Social Security.
Therefore, making a personal retirement savings plan is essential for a number of reasons. Not only does it help you ensure great peace of mind later in life, but will likely improve your spending and saving habits while you’re young. Thinking actively about how much money you need to have later in life will translate to a greater understanding of how you spend today.
According to a 2023 Social Security Administration report, the average life expectancy for 65-year-olds in 1940 was almost 14 years. That number has since increased to over 20 years. People are looking for ways to stretch their money to do more over a more extended period of time. You don’t want to end up at retirement age, afraid you’ll run out of money within a few years.
Retirement Savings Options for Gig Workers
Gig workers face added pressure regarding retirement savings because they have to organize their plans mostly on their own. In this section, we’ll break down three of the most popular retirement savings plan options available to self-employed workers.
The good news is that many of the same options available to full-time employees of companies are also available to self-employed workers.
A solo 401(k), one-participant 401(k), Uni(k), or Solo(k), is probably the most popular option for self-employed workers. If you’re a freelancer or gig worker, a solo 401(k) allows you to grow your retirement savings faster than other options.
You can contribute to a solo 401(k) as both an employer and employee. As an employee, you can make salary deferrals of up to 100% of your compensation (with a limit of $22,500 in 2023).
As an employer, you can make what is called employer nonelective contributions. These allow for contributions of up to 25% of your net earnings from self-employment, with a limit of $66,000 in 2023.
If you’re over the age of 50, you can make what is called “catch-up contributions” of $7,500, further speeding up the rate of your saving. Solo 401(k)s works on a “per person” basis, meaning you won’t be able to make extra contributions by having more than one employer.
Simplified Employee Pension (SEP)
Businesses of any size – anything from a company with 100 employees to a sole proprietorship – can make a SEP plan. SEP plans allow employers to contribute to traditional IRAs for their employees. SEP plans typically carry lower start-up and operating costs than conventional retirement plans.
Let’s say you’re a freelancer creating a SEP plan for yourself. You’ll first want to complete form 5305-SEP to form your plan. Then, you can contribute up to 25% of your net earnings from self-employment into a SEP IRA. The limit on contributions in 2023 was $66,000.
SEP plans are known as “employer-contribution” plans, meaning your employer (if you have one) determines how much goes into your account for you. Suppose you’re a company with very tumultuous profit and loss reports every year. In that case, a SEP plan may be a good choice for you because you’ll have the flexibility to decide how much of an annual contribution you can afford for your employees.
If you have a particularly bad year, for example, a business owner with a SEP plan in place could change how they choose to contribute to their employees’ accounts, as long as the amount is consistent between employees.
Defined Benefit Plan
A defined benefit plan is a more traditional pension plan. These plans come with a stated annual benefit you receive after retirement. In 2023, the maximum annual benefit was $265,000. Contributions are tax-deductible, and the benefits post-retirement are tax-liable.
Defined benefits plans have much higher start-up and maintenance costs than traditional retirement plans. While the amount you can contribute to the account is much higher (optimal for people with higher salaries who want to save a lot in a short amount of time), they require a certain involvement you don’t see with something like a solo 401(k).
For example, you’ll need an actuary to decide your deduction limit when setting up a defined benefit plan, which adds administrative costs.
Remember that it’s possible your employer will have some kind of retirement savings plan included in your contract, even if you’re taking a temporary job. Talk to your employer about what benefits you can expect to receive, but make sure you have some kind of plan in place, whether your employer or you sets it up.
Tips on Securing Your Retirement
Here are our tips for making sure you start saving for retirement early.
Tip #1: Make a budget
One of the least exciting but most important savings tips we can offer is making yourself a budget. For all the young people reading this, we understand going through your transaction history and sorting through business and personal expenses can be tedious. As a gig worker, though, it’s even more essential to keep track of your spending since your income stream is more irregular.
The first step to making a budget should be opening an Excel document and making columns to divide your purchases into smaller categories (some banks will divide transactions automatically in an app for you). Consider which purchases are essential and which you could live without.
Tip #2: Make concrete savings goals
The next tip we have to offer you is making concrete savings goals. This is particularly relevant to retirement savings as it involves thinking ahead about what age you want to retire at, how much money you think you’ll need, and what lifestyle you’ll want to live. Though it may feel silly trying to answer these questions if you’re young, it can be a good starting point for saving.
If, for example, you’re 26 years old, want to retire at age 60, and live in a cabin outside of Cincinnati, you’ll probably need less robust retirement savings than someone who is 40 and wants to live in Los Angeles or New York.
The less abstract your goals are, the better. Vaguely aiming for a certain amount of money makes you less accountable every month when deciding how much to contribute to your savings.
Tip #3: Automate your savings contributions
Our last tip is maybe the most important. Once you’ve selected and started a savings plan, you should automate your contributions to take the work out of saving. As we already said, the initiative is the biggest obstacle to most gig workers making a retirement savings plan. Automating your savings is the easiest way to make yourself save consistently.
As a bonus tip, we recommend trying to maximize contributions. As a gig worker, there will be months you make less money. But if you can save money in another area of your spending and hit your target retirement savings contribution instead, we’d recommend planning for the long run.
The Bottom Line
Setting up a retirement savings plan is an essential part of getting older. No one wants to run out of money when they’re older, so choose a plan and automate your contributions today. As a gig worker, you must take a few extra steps to jump-start your savings but don’t let that stop you.
Equitable is the brand name of the retirement and protection subsidiaries of Equitable Holdings, Inc., including Equitable Financial Life Insurance Company (Equitable Financial) (NY, NY), Equitable Financial Life Insurance Company of America (Equitable America), an AZ stock company, and Equitable Distributors, LLC. Equitable Advisors is the brand name of Equitable Advisors, LLC (member FINRA, SIPC) (Equitable Financial Advisors in MI and TN). GE-6060171.1(19/23)(Exp.10/25)